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Going Into Earnings, Approach CSX Stock With Caution

CSX Corporation (NYSE:)  is slated to report its earnings on Tuesday after the closing bell. Analysts who follow CSX stock, on average, expect the company’s earnings and revenue to rise year-over-year.

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CSX  has benefited from tremendous growth, especially over the last three years. But given the economic headwinds the company could face going forward, the railroad could see its bull run end and partially reverse course. Although CSX stock should serve investors well over the long-term, they should probably avoid buying it ahead of the  company’s earnings.

CSX’s Earnings, Revenue Likely Increased

Analysts on average forecast that the Jacksonville, Florida-based rail company earned $1.11 per share of CSX stock in the second quarter. If the company meets that estimate, that means its EPS  rose nearly 10% year-over-year. Analysts’ consensus Q2 top-line estimate is $3.16 billion, a 1.7% increase from the $3.1 billion CSX reported in Q2 of 2018.

Given these numbers and the performance of CSX in recent years, this company deserves more attention than it’s gotten. Railroad stocks boomed in the 19th century, when they acted as the tech equities of their day. Today, cutting-edge tech looks much different, and rail transport typically does not generate much excitement. CSX stock is not the next Tesla (NASDAQ:) stock. However, investors should pay attention to this sector.

CSX Offers Profit Growth and Dividend Increases

In early 2016, the CSX stock price stood at just over $21 per share. Today, CSX stock trades at over $77 per share. This rally has happened for the right reasons: rising profits and improving cash flows. As a result, the price-earnings (PE) ratio of CSX stock, which stood at around 13.5 a few years ago, has increased to about 18.8 now.

Despite this still-low multiple, analysts, on average, expect CSX’s profit to rise 13% this year and 9.7% in 2020. Both Union Pacific (NYSE:) and Norfolk Southern (NYSE:) offer slightly higher growth and have slightly higher PE ratios. Still, with these metrics, CSX stock looks like it will be a winner over the long-term.

The company’s track record has also been strong when it comes to its. With a yield of about 1.25%, investors will probably not buy CSX stock for the payout. However, since 2005, the company has increased its dividend almost every year, making it very reliable in that area.

Watch CSX’s Forward Guidance

Despite the recent strength of CSX’s results (or maybe because of it), investors should pay careful attention to its forward guidance. The current economic expansion has reached its 11th year. Moreover, the ongoing trade war with China could disrupt the raw material exports on which CSX depends.

This might explain why than expected full-year revenue guidance in January. Further signs of slowing could end the bull run of CSX stock, which has benefited those who have owned the stock over the long-term. With its low costs compared to other types of freight, I expect rail transport to remain a fixture for a long time to come. However, I do not recommend buying this name going into earnings.

The Bottom Line on CSX Stock

Despite the stellar performance of CSX stock, investors should take a cautious view of the equity going into earnings. CSX has beaten consensus earnings estimates in each of the last four quarters.  Consequently, I would expect its EPS to come in higher than the expected $1.11 per share.

However, I think investors should focus on its guidance. In recent months, consensus expectations for its annual revenue growth has dropped from high-single-digit-percentage levels to the low-single-digits. In light of the current economic conditions, CSX could cut its guidance further.

I do not think the company’s results will change the long-term bull case on CSX stock. Trading at roughly 18 times  earnings and delivering (almost) double-digit-percentage EPS growth, CSX remains reasonably priced. However, since the equity could easily drop from these levels, I think traders should stay on the sidelines on CSX stock for now.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can at @HealyWriting.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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