CSX Corp. Stock Has Derailed – CSX Corporation (NASDAQ:CSX)

CSX Corporation (NASDAQ:CSX) had been one of our best performing recommendations of the year. It rallied hard and continued to chug along as it entered 2019, but recently began to stall. Now we know why. The market began sensing some weakness in recent months, despite the overall market rallying to new highs. The company has just reported earnings which we will discuss here, but we believe it is time to sell CSX here at $75. Let’s discuss.

Recent price action showed CSX stock stalling

The stock has had a strong run this year from the lows. We believe that the recent price action suggested the market was skittish on the name, trading mostly sideways the last 6 weeks:

Source: BAD BEAT Investing

The chart was strong from January until May, when the market seemingly picked up on some weakness. Perhaps the railroad data was a tell. Perhaps economic activity led to revaluation. Whatever it was, the stock stalled. showing a lot of positive momentum. The quarter showed it was indeed a week quarter. From an operational perspective, it was a so-so quarter for the railroad company, but it is what lies ahead that is more concerning and why we are avoiding the name at these levels.

A puzzling economy

CSX’s performance, in conjunction with a confusing economy in 2019 and beyond, so-so economic data, and moderated oil prices are what have driven the stock sideways. That said, performance is decent, but not strong. The murky outlook has us concerned. CSX’s operational efficiencies have been improving but company’s results demonstrate the impact of external economic forces, which the CEO considers “puzzling.”

Turning to the results it was a weaker than expected quarter for the company, which we believe will push the stock to challenge the $70 support level. This is a very important level, and will be tested despite a bull market that has run for nearly 10 years. The economy appears to be strong, but the results from CSX suggest pockets of slowdowns are possibly occurring. The company continues to chug along but the results missed expectations on both the top and bottom line and the trajectory of revenues and earnings are of prime concern here.

Revenue expansion

While the company had delivered slow and steady growth, revenues contracted in Q2. The top line revenue figure came in at $3.06 billion, which was down 1.3% year-over-year. This reverses recent growth in the last few Q2s:

CSX Corp. Stock Has Derailed - CSX Corporation (NASDAQ:CSX)

Source: SEC Filings, graphics by BAD BEAT Investing

Although revenues were down, the bigger story is that they whiffed on expectations by $80 million. We had expected 1% growth in revenues, not a miss, so this really changes our previously bullish outlook. One reason for the year-over-year decrease was intermodal weakness. That said, merchandise was strong, but the overall result is bearish.

Expense management solid, but not enough to offset the revenue miss

While revenue was down 1.3%, the company managed to slash expenses significantly:

CSX Corp. Stock Has Derailed - CSX Corporation (NASDAQ:CSX)

Source: SEC Filings, graphics by BAD BEAT Investing

This type of expenditure control is a testament to strong management, and strong discipline of the company to stick to its spending plans. Revenue is increasing while expenses declined 8%. Expenses decreased 3% year-over-year to $1.76 billion, driven by continued efficiency gains and volume-related savings. and the operating ratio set an all-time company quarterly record of 57.4% versus 58.6% in the prior year. That was a hidden positive

Bottom line miss still hits results

With a drop in revenues and the decline in expenses, operating ratio and earnings were up. However, earnings per share were also up from last year, but missed consensus by $0.03. Considering these factors, CSX saw adjusted Q2 2019 net earnings of $870 million, down from the $877 million last year. But with a reduced share count, this translates to $1.08 per share this quarter, up from $1.01 last year:

CSX Corp. Stock Has Derailed - CSX Corporation (NASDAQ:CSX)

Source: SEC Filings, graphics by BAD BEAT Investing

This shows the pace of earnings stalling, while revenues declined. This is why we expect weakness in the stock. While we thought expense management would be solid given what we had seen from the company in the last year, the results were well below our expectations. What is worse is that it does not seem like there will be improvements anytime soon.

Lowered 2019 expectations

Over the last few years we knew that there were some strong pockets of organic growth for the company in 2016 and 2017. In 2018, the company was firing on all cylinders operationally. Here in 2019, it has changed. What looked like a more favorable pricing environment versus the last two years has not helped overall headline results, despite boosting operating efficiency to records. There was volume growth declines in some markets, and a mix that is questionable. We continue to expect the company to struggle compared to 2018 for the rest of the year, and with it, the stock could see the $60 range.

While we continue to have expectations for a robust economy in 2019, when we factor in CSX’s year-to-date performance and new guidance, we have concerns. We were projecting growth in 2019 for both revenues and earnings, but now it seems revenues will contract. For the year 2019, we are projecting revenues of $11.9 to $12.1 billion, well below the $12.35 billion we originally thought was likely for the year. Given that the operating income ratio has improved tremendously as well as comparable share buybacks, we see earnings per share now approximating $4.00-$4.20 for the year, which is low growth, but growth nonetheless. Still, we have concerns, especially if we see the economic data worsen

Avoid the name

The company is significantly reducing its cost structure while cutting expenses. Share repurchases continue and are the reason EPS is growing, but net income was squeezed. After shares have had a huge run up year-to-date, we think you have to sell the stock here at $75. We see the stock falling to the $60 range.

This week only take 50% OFF the annual membership price at BAD BEAT Investing!

If you enjoyed reading this column and our thought process you should immediately join our community of traders at BAD BEAT Investing.

CSX Corp. Stock Has Derailed - CSX Corporation (NASDAQ:CSX)

We are available all day during market hours to answer questions, and help you learn and grow. Learn how how to catch rapid-return trades.

  • 2-3 rapid-return trade ideas each week
  • Monthly deep value plays
  • Access to a dedicated team, available all day during market hours.
  • Target entries, profit taking, and stops rooted in technical and fundamental analysis

CSX Corp. Stock Has Derailed - CSX Corporation (NASDAQ:CSX)

Click here to start your risk-free trial.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.