Over the past six months, CSX has been a great trade, beating the S&P 500 by 29.2%. Its stock price has climbed to $48.79, representing a healthy 38.1% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy CSX, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think CSX Will Underperform?

We’re happy investors have made money, but we’re swiping left on CSX for now. Here are three reasons we avoid CSX, plus one stock we’d rather own.

1. Sales Volumes Stall, Demand Waning

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Rail Transportation company because there’s a ceiling to what customers will pay.

Over the last two years, CSX failed to grow its units sold, which came in at 1.56 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests CSX might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

CSX’s unimpressive 7.6% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, CSX’s margin dropped by 15.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. CSX’s free cash flow margin for the trailing 12 months was 14.3%.

Final Judgment

We see the value of companies helping their customers, but in the case of CSX, we’re out. With its shares topping the market in recent months, the stock trades at 24.8× forward P/E (or $48.79 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.

Stocks We Like More Than CSX

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