CSX has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.7%. The stock now trades at $50.19, marking a 21.4% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in CSX, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think CSX Will Underperform?
Despite the momentum, we don’t have much confidence in CSX. Here are three reasons we avoid CSX, plus one stock we’d rather own.
1. Weak Sales Volumes Indicate Waning Demand
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.
CSX’s units sold came in at 1.68 million in the latest quarter, and over the last two years, averaged 1.8% year-on-year growth. This performance was underwhelming and suggests it 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 5.8% 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
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, CSX’s margin dropped by 6.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. CSX’s free cash flow margin for the trailing 12 months was 20.4%.
Final Judgment
We see the value of companies helping their customers, but in the case of CSX, we’re out. With its shares outperforming the market lately, the stock trades at 23.5× forward P/E (or $50.19 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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