CSX: Traditional Earnings Beat Doesn't Add Value

| About: CSX Corporation (CSX)

Summary

CSX Corp. beat Q3 EPS estimates, while missing revenues yet again.

The company remains on pace for negative trends despite help from lower share counts.

The recent rally in the stock already prices in any potential upside from higher earnings in 2017.

After the close, CSX Corp. (NYSE:CSX) reported the traditional earnings beat and revenue miss. The railroad operator has a history of strong operations even despite the multi-year headwinds in the macroeconomic and, specifically, the energy sector.

The question, though, is whether the stock offers any value considering the flat-to-down trend in the actual results. The market has a tendency to ignore this trend most notable in the volatile stock price despite constantly reduced expectations going forward, as evident by these quarterly numbers.

For Q3, CSX beat EPS estimates by $0.03, but the actual results of $0.48 were down from the $0.52 earned last year. A big note, though, is that net earnings were actually down a rather large 10% to only $445 million.

The company was able to trim the EPS impact to only $0.04 by reducing the share count by 39 million shares since last Q3. It has spent nearly $800 million on stock buybacks this year and about $260 million during Q3.

The good news is that CSX somewhat aggressively bought shares on the stock dip over the last year. The amount spent on stock repurchases this year doesn't add up to much, with the stock now worth $28.5 billion. A big question is whether the railroad operator will buy shares with the stock now above $30.

CSX Chart

CSX data by YCharts

While stock buybacks are a good sign that the management team sees the stock as cheap, CSX is spending a rather immaterial amount on these repurchases. At the current annualized rate, it would only repurchase about 3.5% of the outstanding stock within a year. This amount doesn't even consider that the company could easily pull back on buybacks with the stock back over $30 and net debt position around $9 billion.

Over the last seven quarters, CSX missed revenue estimates in all but one quarter. The company naturally beat EPS estimates every quarter, highlighting the problem with focusing solely on EPS beats like the one from Q3.

Click to enlarge

Source: Seeking Alpha earnings

The key learning point here is that the importance of an earnings beat is overstated. The company has constantly beat earnings over the last couple of years, yet the stock collapsed and eventually rallied.

The bigger concern is the valuation proposition, highlighted by how CSX didn't buy stock at over $35 back in 2015 and made some tepid buys below $30 in 2016. The stock just doesn't offer a lot of value, especially for a company with a weak balance sheet and declining EPS trends.

CSX PE Ratio (Forward 1y) Chart

CSX PE Ratio (Forward 1y) data by YCharts

The big investor takeaway is that CSX beats estimates from managing the business and forecasting well, but the railroad operator isn't growing earnings as needed to justify a higher stock price.

The stock trades at roughly 16x forward EPS estimates, while the business remains under pressure. The recent rally in CSX leaves the stock with limited upside.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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