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This article examines CSX Corp. (CSX), one of the nation's leading transportation companies, through the lens of the FAST Graphs™ fundamentals analyzer software tool. CSX is a company that appears undervalued based on historical earnings. Given that analysts are forecasting this company to grow at 15%, this may be a good time for prudent investors to take a closer look at this company by conducting their own due diligence.

Earnings Determine Market Price

The following earnings and price correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings and Price Correlated Fundamentals at a Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on CSX shows a picture of undervaluation based on the historical earnings growth rate of 21.8% and a current P/E of 11.9. Analysts are forecasting the earnings growth to continue at about 15%, and when you look at the forecasting graph below, the stock appears undervalued (it's outside of the value corridor of the five orange lines -- based on future growth).

CSX: Historical Earnings, Price, Dividends, and Normal P/E Since 2001

Click to enlarge images.

The associated performance results with the earnings and price correlated graph validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 14.2% capital appreciation (green circle), long-term shareholders of CSX, assuming an initial investment of $1,000, would have received an additional $559.49 in dividends (blue highlighting) that increased their total return from 14.2% to 15.3% per annum vs. 2.2% (red circle) the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price/earnings ratio on this quality company is as normal as it has been since 2001.

A further indication of valuation can be seen by examining a company's current price/sales ratio relative to its historical price/sales ratio. The current price/sales ratio for CSX is 1.82, which is historically normal.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance. The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component toward making sound and prudent commonsense investing decisions.

The consensus of 29 leading analysts reporting to Capital IQ forecast CSX's long-term earnings growth at 15% (orange circle). It has medium long-term debt at 48% of capital (red circle). The company is currently trading at a P/E of 11.9, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based on forecast earnings growth of 15%, the company's share price would be $49.88 at the end of 2017 (brown circle on EYE Chart), representing a 20.6% annual rate of total return, which includes dividends paid.

Earnings Yield Estimates

All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in CSX to an equal investment in 10-year Treasury bonds illustrates that CSX's expected earnings would be 9 times (purple circle) that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary and Conclusions

This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Even though with just a quick glance you can know a lot about the company, it's imperative that readers conduct their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

Source: CSX Corp.: Fundamental Stock Research Analysis