Is It Time To Sell CSX Corporation (NASDAQ:CXS)?

CSX Corporation Falls On Mixed Results

Shares of CSX Corporation (NASDAQ:CSX) are moving lower in the early premarket session after a mixed Q4 earnings report. The report was better than expected in most regard but failed to do something the market was expecting. Beat the consensus. This phenomenon is not an isolated event, it is one driven by the high expectation for an economic rebound, and one that may impact the market for CSX and other stocks over the course of the next quarter. But that does not mean CSX is a sell, not necessarily. The company produced a solid report and gave a favorable outlook, all the market needs now is to see 2021 unfold the way it is expecting and more.

CSX Corporation Shows Internal Improvement

CSX reported $2.83 billion in net revenue for the quarter, down -2.1% from the previous year,  but 150 basis points better than expected. The relative strength in revenue was driven by a 4% increase in volume that was itself driven by a 6% increase in the Intermodal segment and offset by drastically lower fuel surcharges and a decline in coal shipments.

Moving down the report, the company grew its operating income by 5% to $1.22 billion on the combination of lower fuel costs and internal efficiencies. In total, the company reduced its costs by 7% on a YOY basis driving not only an improvement in the operating ratio but beat its own targets. The company’s operating ratio fell to 57% from last year’s 60% and beat the consensus by 70 basis points as well.

On the bottom line, the GAAP EPS of $0.99 fell short of the consensus by $0.3 but there is a mitigating factor. The company incurred a charge for the early retirement of debt (a good thing in the long-term) in the amount of $48 million or $0.05 per share. On an adjusted basis the $1.04 in EPS beats by $0.02 which still isn’t a lot, not for a market expecting the average S&P 500 company to beat the consensus by double-digits.

CSX Corporation Is Leveraged For Earnings Growth

CSX Corporation and the entire rail industry began 2021 on a positive footing. The increase in economic activity, driven by an increase in eCommerce and demand for home-goods, had rail traffic at near pre-pandemic levels at the end of December and sequential growth continued into the first week of the year. The Association of American Railroads reports a 4.4% increase for the week driven by a 10% increase in intermodal units. This trend should not only continue into 2021 but accelerate as the reopening gains momentum. Because CSX has reduced its costs in a sustainable way the increase in traffic and subsequent rise in revenue should drive an exponential increase in earnings.

“we accomplished a lot this past year,” said CFO Keven Boone on the conference call “which sets us up well, as the economy recovers from the impact of the pandemic. While many markets remain challenged, we did see an improving business environment in the fourth quarter and as a result delivered both volume and operating income growth for the first time in 2020. We manage costs through the year and made sustainable improvements to the train plan which will drive operating leverage as volumes return. We once again delivered a quarterly record operating ratio,”

The Technical Outlook: CSX Falls Out Of Favor

Shares of CSX fell more than 2.0% in the early premarket action extending a move below the short-term moving average. Price action is still above a key support level so a deeper correction may not come but investors should be prepared. The indicators suggest the move lower is gaining momentum and may retest support at the $87.50 level if not move lower. A break below the $87.50 level would be bearish and may lead price action down to the $85 and $80 levels in the near to short-term. Longer-term, CSX is well-positioned to benefit from the coming economic boom. Earnings growth should outpace revenue growth and drive share prices higher. Until then, investors can rely on the 1.15% dividend yield.