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All Aboard! CSX Corporation Stock May Have 30% Upside

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It’s surprising to see that shares of CSX Corporation (NASDAQ:CSX) haven’t been hit harder in recent weeks, with increasing volatility in the stock market and escalating trade-war concerns between the U.S. and China. Despite all of this, CSX stock is only about 8% off its March highs.

I thought for sure it would be down more than that. So what do we make of this better-than-expected performance?

If you ask Thomas Wadewitz, an analyst at UBS, he still expects some impressive upside. The company’s recent analyst day provided a “clear plan highlighting opportunities and drivers of operating improvement,” according to Wadewitz.

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Currently, he sports a buy rating and $72 price target, implying about 30% upside from current levels. He came out with that price target on Mar. 2, the same day that Deutsche Bank analyst Amit Mehrotra slapped a $70 price target on CSX stock. More recently, Susquehanna analysts assigned a $68 price target on Apr. 2.

Clearly, analysts expect some big-time upside. Also worth noting is that the average price target is almost $10 per share or about 18% higher than current levels.

Valuing CSX Corporation

One thing that’s nice about CSX stock? Its valuation. Shares trade at just 17.5 times this year’s earnings estimates and just 14.8 times 2019 estimates. Depending on its growth, though, 17.5 times earnings can either be a bargain or a huge premium. So which is it?

If consensus estimates are right, CSX stock look like a bargain.

Analysts expect earnings to grow 34% this year and another 18% in 2019. That’s despite revenue estimates calling for just 1.2% and 3.6% growth in 2018 and 2019, respectively. Like Wadewitz says, operational improvements are expected, and that’s shown in these estimates.

What happens when revenue grows 1.2% but earnings explode by more than 30%? Margins go through the roof. Operating cash flow and EBITDA should also see a significant increase. Clearly CSX is getting its act together and significantly increasing its efficiency.

It helps that the U.S. economy is humming along just fine. While we may not be experiencing massive growth, it’s consistent, stable and looking free of a recession for the foreseeable future. Consumers are confident, as are businesses, and that’s good news for commerce. When commerce is strong, so are the rails.

Worth noting is CSX’s competition. Its earnings growth for 2018 and 2019 is vastly superior to Kansas City Southern (NYSE:KSU) and Norfolk Southern Corp. (NYSE:NSC). Given that all three trade with a similar valuation, CSX stock seems like a no-brainer among the group given its better earnings growth.

However, also worth pointing out is that both KSU and NSC are forecast to grow sales by more than 6% in each of the next two years, compared to CSX’s rather dismal revenue growth.

Trading CSX Stock

First, you’ll see a blue line of support. This level was former resistance for about six months, and it finally gave way and became support in early December. Still, CSX has been testing this level around $54 a lot over the past few weeks. That has me thinking it could breakdown unless the broader market rallies and takes CSX stock higher, too.

chart of CSX stock price
chart of CSX stock price


Click to Enlarge

Another negative development is that downward trend-line (in black). That could keep a lid on CSX stock, even if it does bounce off this current level of support.

So where should we buy CSX stock? I don’t know that it will get there, but the $48 level (in purple) has proven to be a great buying opportunity. The stock has found support near this level for a year, and my guess is that it will hold again should CSX test it.

At the very least, it would be a good risk/reward proposition because if it fails, we can bail with very minimal losses. Unfortunately, CSX stock would need to fall around 13% before testing these levels, something I’m not sure will happen given how well it’s held over the past few weeks.

For that reason, I’ve highlighted $51 in green as a spot more aggressive traders can consider buying near.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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