Start Buying the Biggest Eastern Railroad CSX Corp.

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CSX Corporation (CSX), together with its subsidiaries, provides rail-based transportation services. It offers traditional rail service and the transport of intermodal containers and trailers. The company transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, automotive, paper, and chemical products; and also utility, industrial, and export coal to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities. Additionally, it provides intermodal transportation services through a network of approximately 50 terminals

CSX Corporation (CSX), based in Jacksonville, Florida, is one of the nation’s leading transportation companies, providing rail, intermodal and rail-to-truck transload services. CSX‘s network spans approximately 21,000 miles, with service to 23 eastern states. As of press time, the stock recently closed at $20.58. In the past year, the stock has hit a 52-week low of $19.87 and 52-week high of $23.71. Technical indicators for the stock are bullish for the short and intermediate term and the company’s fundamental ratios are strong.

GROWTH AND BALANCE SHEET

The company has increased EPS by 6.5% the last quarter while annual earnings growth rate over the past five years is 12.62%. Revenue for the quarter decreased 2% year over year to $2,894 million. The declining revenue has not hurt the company’s bottom line. Our main concern is the declining coal revenues with a fall of 17% year over year. The revenue is down to $791 million in the third quarter on a volume decline of 16%. Utility coal shipments continued to decline as a result of low natural gas prices. The total debt/equity of 100.59% is rather high and unfavorable.

More on the stock valuation after the JUMP!

VALUATION

The biggest eastern railroad in the US, CSX has a PEG ratio of 0.88, below the industry average. The P/E of 11.54 is very attractive and below the industry average. The stock is currently trading below its fair value of $31. The beta of 1.36 implies high volatility of the stock with respect to the S&P 500. CSX pays a quarterly dividend of$0.14, for an annual dividend yield of 2.5%.

RECOMMENDATION for next 6 months: We initiate our coverage with START BUYING. The company has demonstrated a pattern of bullish technical signs, steady earnings performance and cheap valuation. CSX has overhead space with shares priced $20.75, or 19.0% below the average consensus analyst price target of $25.63. Shares are down 2.52% year to date as of the close of trading yesterday.

For trading we suggest a long call at $23.33 strike price January expiration at $0.13 per contract and short the call at 22.5 strike December expiration for $0.14 per contract.

NEWS and CALENDAR

01/22/13                             Q4 2012 Earnings Release

Tuesday October 23, 2012 – CSX down to two sites for future Pittsburgh terminal

Thursday October 18, 2012 – CSX (CSX) was downgraded by Deutsche Bank (DB) to hold from buy with a price target of $20 due to lower coal volume.

Tuesday, October 16, 4:08 PM – CSX (CSX): Q3 EPS of $0.44 beats by $0.01. Revenue of $2.89B (-2% Y/Y) misses by $40M.

CSX Strengths

• Regional Barriers to Entry
• Growth in earnings per share

CSX Weakness

• Fuel Cost
• Lower coal volume
• Increased competition

Competitor Comparison     CSXNSCUNPIndustryMarket Cap:21.29B19.58B57.18B2.65BEmployees:31,34430,32945,88213.39KQtrly Rev Growth (yoy):-0.02-0.070.050.08Revenue (ttm):11.82B11.15B20.78B2.20BGross Margin (ttm):0.380.370.440.32EBITDA (ttm):4.52B4.11B8.36B391.21MOperating Margin (ttm):0.300.290.320.17Net Income (ttm):1.87B1.81B3.87BN/AEPS (ttm):1.795.498.061.78P/E (ttm):11.5411.2815.0715.71PEG (5 yr expected):0.880.891.041.04P/S (ttm):1.801.732.741.86

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

CSX’s intrinsic value is $31.00 the current price is $20.59, the stock trades 50% below its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

Each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. CSX’s annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.92, 1.21, 0.95, 1.36, 1.67 this type of earnings action is favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

CSX’s Total Debt/Equity of 100.59% is not acceptable.

Quarterly EPS Change (This Quarter VS. Same Quarter Last Year)

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

CSX’s EPS growth for this quarter relative to the same quarter a year earlier is 6.50% below our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

CSX annual earnings growth rate over the past five years is 12.22%, is at our target growth level.

Current Price Level

Traders should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

CSX’s 52 week high is $23.71 current price is $20.58, 15% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 11.54 the average industry P/E ratio is 15.71 and well below the S&P 500 P/E ratio of 16.30

Insider Ownership

When there is strong insider ownership which I define as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.40% of CSX stock. Management’s representation is not large enough. This does satisfy the minimum requirement.

Technical Analysis

I am using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

CSX formed a Bullish Bollinger Band Crossover signal. CSX shares should first meet resistance at 21.6 and find additional resistance at 23.40.