Should You Buy CSX After Earnings?

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On Tuesday after the market closed, CSX Corp. (NYSE:CSX) reported its first-quarter earnings for 2014. Initially, the stock spiked on the announcement to over $29 per share from a market close of $28.29. For a low beta stock such as CSX, this is a sizeable move. However, shares quickly came back down to trade at about $28.50, which is slightly higher than the market close and a key level of resistance from a technical standpoint.

CSX Corp. is one of the larger players in the rail transport industry. This industry has benefitted over the past several years from its competitive advantage over truck transport companies. The latter industry has much higher fuel and labor costs than the former. It also has a relatively low barrier to entry, whereas it takes billions of dollars of infrastructure buildout in order to develop a system of rail lines as extensive as CSX’s.

CSX predominantly operates in the eastern United States, east of Chicago. It also has operations in eastern Canada. The company ships a wide variety of goods from coal to consumer goods to automobiles. It is a steady business with consistent profits, strong margins, and shareholder-friendly policies. Meanwhile, it trades at a discount to the S&P 500 and pays a higher dividend, as well. These factors make it an attractive long-term investment. However, is now a good time to buy?

The company’s earnings came in essentially in line with analyst estimates, at $398 million, or 40 cents per share, versus $462 million, or 45 cents per share, in the first quarter of last year. The decline can be attributed to weakness in coal shipments, as well as unusually cold weather. These negatives were partially offset by a rise in intermodal shipments (think of intermodal containers as containers that are designed to be easily shipped by ship, truck, or rail).

Despite this near-term weakness, management believes that the company has a lot of potential to grow its earnings going forward. Management is confident that it will be able to grow the company’s earnings in the low double digits in the coming years.

This confidence is evidenced by a 7 percent dividend increase from 15 cents per quarter to 16 cents per quarter. This gives the shares a 2.26 percent yield at Tuesday’s closing price. This isn’t that high compared with the dividend yield of the S&P 500, which is about 1.8 percent, although it is still higher. Furthermore, the company returns capital to shareholders through stock repurchases.

Based on the above earnings number versus the earnings per share number, we can see that the company had an average share count in the first quarter of 995 million, which is below the slightly more than 1 billion shares outstanding as of the end of the year.  As the company buys back its own stock, each share represents a larger portion of the company, and continued buybacks and dividend increases over a long period of time can really add up if you hold on to your position.

Ultimately, this paints a very compelling picture for the future of CSX shares. Nevertheless, I would hold back on putting money to work in this name, although I am not selling my position, either. Despite last week’s selloff in stocks, investors are still fairly optimistic that they will continue to rise.

I think that we can see a correction in the overall market. While CSX will probably decline less considering the aforementioned points, I think it is vulnerable to the downside. With that being said, I would wait to buy the stock until it hits the $26-$27 range, which is where it found support the last time investors were pessimistic, after fourth-quarter earnings came out.

Disclosure: Ben Kramer-Miller is long CSX Corp.

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