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THREE REASONS TO AVOID CSX AND ONE STOCK TO BUY INSTEAD

StockStory - StockStory - Wed Dec 25, 3:04AM CST


CSX has been treading water for the past six months, recording a small return of
1.1% while holding steady at $33.08. The stock also fell short of the S&P 500’s
10.4% gain during that period.



Is now the time to buy CSX, or should you be careful about including it in your
portfolio? Check out our in-depth research report to see what our analysts have
to say, it’s free.

We're cautious about CSX. Here are three reasons why we avoid CSX and a stock
we'd rather own.


WHY DO WE THINK CSX WILL UNDERPERFORM?

Established as part of the Chessie System and Seaboard Coast Line Industries
merger, CSX (NASDAQ:CSX) is a transportation company specializing in freight
rail services.


1. LONG-TERM REVENUE GROWTH DISAPPOINTS

Examining a company’s long-term performance can provide clues about its quality.
Any business can put up a good quarter or two, but the best consistently grow
over the long haul. Over the last five years, CSX grew its sales at a sluggish
3.8% compounded annual growth rate. This fell short of our benchmark for the
industrials sector.


2. SALES VOLUMES STALL, DEMAND WANING

Revenue growth can be broken down into changes in price and volume (the number
of units sold). While both are important, volume is the lifeblood of a
successful Rail Transportation company because there’s a ceiling to what
customers will pay.

Over the last two years, CSX failed to grow its units sold, which came in at
1.59 million in the latest quarter. This performance was underwhelming and
implies there may be increasing competition or market saturation. It also
suggests CSX might have to lower prices or invest in product improvements to
accelerate growth, factors that can hinder near-term profitability.


3. FREE CASH FLOW MARGIN DROPPING

Free cash flow isn't a prominently featured metric in company financials and
earnings releases, but we think it's telling because it accounts for all
operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, CSX’s margin dropped by 8.5 percentage points over the
last five years. If its declines continue, it could signal higher capital
intensity. CSX’s free cash flow margin for the trailing 12 months was 20.6%.


FINAL JUDGMENT

We cheer for all companies making their customers lives easier, but in the case
of CSX, we’ll be cheering from the sidelines. With its shares trailing the
market in recent months, the stock trades at 15.7× forward price-to-earnings (or
$33.08 per share). While this valuation is reasonable, we don’t see a big
opportunity at the moment. There are superior stocks to buy right now. Let us
point you toward CrowdStrike, the most entrenched endpoint security platform.


STOCKS WE WOULD BUY INSTEAD OF CSX

The elections are now behind us. With rates dropping and inflation cooling, many
analysts expect a breakout market to cap off the year - and we’re zeroing in on
the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Strong Momentum Stocks
for this week. This is a curated list of our High Quality stocks that have
generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia
(+2,691% between September 2019 and September 2024) as well as under-the-radar
businesses like United Rentals (+550% five-year return). Find your next big
winner with StockStory today for free.

This article contains syndicated content. We have not reviewed, approved, or
endorsed the content, and may receive compensation for placement of the content
on this site. For more information please view the Barchart Disclosure Policy
here.




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