Betting Against CSX?

CSX Corp. (NASDAQ: CSX) is a relatively easy business to understand. Ever play Monopoly and buy up all the railroads? CSX is in the business of transporting goods via train on its vast network of track in the eastern United States. Around 21,000 route miles of track in 23 states, and extending into parts of Canada. Not too difficult to understand what’s going on here, but why am I looking at CSX?

A few of my latest posts have been about looking for something to short (via put options). The problem is, while the market jumped to all-time highs (or near all-time highs depending on what index you favor) after Trump’s victory, the things I’ve considered betting against haven’t done that well. Which would be fine if I HAD bet against them, but I haven’t yet. I was, and still am, waiting for higher stock prices to buy my puts against. So I got to thinking, what WAS making new 52-week highs lately. To my surprise, CSX was on the list. I’ve never seriously looked at the railroads before, but I’m always reading about what’s going on in the market. For the longest time I’d heard about how the rails were hurting because of the decline in coal shipments. Coal is some pretty nasty stuff, and apparently we aren’t going to be using as much of it going forward. So why is CSX on the new high list?

On November 9th, CSX presented at Baird’s 2016 Industrial Conference, laying out its long-term strategy and updating its fourth quarter 2016 guidance. Now, keep in mind that as I write this, the stock is at a 52-week high of about $34.60, and the highest it’s EVER been was $37.99 in late 2014. Here’s one piece of what was said during the presentation. (It’s available via webcast online, and is highly recommended)

In the fourth quarter, they expect an 8 cent EPS impact from costs associated with refinancing near term debt. The company expects earnings to reflect prior guidance of flat to slightly down, if you EXCLUDE the 8 cent hit. So here’s how I see this. It’s going to cost them 8 cents a share to refinance their debt, which will obviously mean that their EPS isn’t going to be as good. But if that hadn’t happened, their earnings would be consistent with prior guidance. (Similar or perhaps down a little from last year) Does that sound like a company that should be on the 52-week high list? ‘Oh yeah, it’s gonna cost us to repackage this near-term debt, but if we didn’t have to do that, we’d make the same or a little less than this time last year.’ Hummmm…

They also talked about transitioning away from coal, toward more service-sensitive and international markets. There was talk of the CSX of Tomorrow, but not a lot of detail on it. They did estimate that over the past 5 years they’ve lost $2 billion in revenue due to the decline in coal, and they weren’t too hopeful about a near term recovery.

They did, however, talk about cost cutting and efficiencies. Train length has grown 20% since 2014. They talked about reduced labor, fuel efficiency, technology, predicitive analytics, etc… Over the past few years revenue has stalled, as well as earnings, but cost cutting and efficiency improvements are going to lead the way? Does that sound like a company that should be on the 52-week high list? Ok, so I’m a little skeptical.

I listened to their Q3 earnings call, held in October, and wow. Revenue declines (8% vs prior year!), earnings declines, volume declines, coal declines… Just like the Baird Industrial Conference, there was a lot of talk about efficiency. Here are a few snippets from the call. I would encourage anyone interested to listen to the call to get the full picture of what’s going on.

“…we continue to see a soft but stabilizing industrial economy with volume down year-over-year…”

“…Chemicals will be down with continued weakness in drilling related products, especially crude oil due to low crude oil prices and unfavorable spreads…”

“…Domestic coal will again be down, however, in the fourth quarter we will cycle the start of the pronounced market weakness, which took hold in the fourth quarter last year…”

There were a few points where they talked about upcoming easier comps for specific business metrics, which I took to mean that in the past things looked so bad that their current mediocre forecasts look almost good.

Ok, I’m obviously focusing on the negative here. They talked about positive things as well. But most of the ‘good’ were cost and operational efficiency improvements, things that any company should be focused on all the time. It seems to me that the market has priced in a strong near term recovery in CSX, a recovery that I just don’t see evidence of. I believe if the company falters, or if the overall market does, this stock will be hit hard. Very hard.

What are the risks? Well, it sounds like CSX is working hard on these efficiency improvements. What if the economy takes off? What if they get a lot of business? They could earn a ton of money if they generate more revenue. It could happen. I have an order in betting it doesn’t.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada