Did CSX Corporation’s Rebound Just Go Off The Rails?

Key Points

• CSX had a tepid quarter, but the business is resilient and on track to regain growth. 
• Capital returns are safe and will continue to flow in 2023. 
• Analysts support the stock and see it moving higher from the post-release lows. 

CSX Corporation NASDAQ: CSX stock has been trying hard to get off a technical bottom, and the recovery might have gone off the rails. The Q2 results were less than expected and caused shares prices to tank nearly 5%. Among the many headwinds the company faces is industry normalization which is the operative word.

The rail industry is normalizing along with the rest of the economy, CSX business is stabilizing well above the 2019 levels, and there is growth in the forecast. Regarding the 2019 business, Q2 2023 revenue is up 21%, the operating ratio widened 250 basis points, and income nearly doubled. 

“Though intermodal activity remains challenged, our strong service performance distinguishes us in the marketplace and is attracting shippers to our network. We look forward to meeting the opportunities ahead in the second half of the year and over the long term as we position CSX for sustainable, profitable growth,” said Joe Hinrichs, President and CEO.

CSX Has Solid Quarter: Shares Pull Into Buy Zone

CSX had a solid quarter, but multiple offsetting factors within the business mix left results down compared to last year and slightly below consensus. The company reported $3.7 billion in net revenue: a decline of 3.1% compared to last year. The revenue missed consensus by $0.030 billion, or about 80 bps, which is a slim miss given the conditions.

The offsetting factors are lower fuel surcharges, lower supplemental income, lower coal prices,  and intermodal volume offset by increased coal shipments and strength in the merchandise business. The takeaway is that diversification underpins CSX results and should continue to provide resiliency if not strength. 

The margin news is equally tepid, with operating income falling 13% to $1.48 billion. This is despite an improvement in the operating ratio, which came in better than expected. The operating ratio improved 450 bps YOY to 59.9% or 0.1% better than expected.

The salient point is that GAAP earnings of $0.49 are down 9% compared to last year, but a full 80% of the decline is due to 1-off factors. Adjusting for that, earnings are down a mere penny and well within expectations. The company does not give formal guidance but shows some resiliency. Based on the outlook from other industrial names, investors should expect conditions to remain stable in Q3. 

CSX Corporation Is A Most Upgraded Stock 

CSX Corporation has had only 1 outright upgrade in 2023, and the price target activity is mixed but bullish on balance and enough to land the stock on Marketbeat.com’s Most Upgraded Stocks list.

The stock is pegged at a firm Moderate Buy with a price target that assumes about 4% of the upside to the pre-release price action. That margin has widened to nearly 10% in the post-release, pre-market action, opening up a buying opportunity.

The three revisions in the few hours after the release include one reiterated rating and price target and two lowered price targets that amount to a Buy rating with a consensus of $37. That’s above the current $35.05 consensus and on the verge of a new all-time high for the market. 

The stock price is down about 3.5% in premarket trading, showing resistance at the 2023 high. The pullback could gain momentum but is still above critical support near the 150-day moving average. If the market buys this dip, a signal should form at or near the 150-day EMA; otherwise, CSX may be in for a deeper correction. In that scenario, shares could pull back to $30 or $28. If the market buys the dip, investors should expect the price to retest $34 by the end of the year.