CSX has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.2% to $33.85 per share while the index has gained 15.7%.
Is there a buying opportunity in CSX, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think CSX Will Underperform?
We're cautious about CSX. Here are three reasons why CSX doesn't excite us and a stock we'd rather own.
1. 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 1.58 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. 
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
CSX’s unimpressive 6% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
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 21.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. CSX’s free cash flow margin for the trailing 12 months was 14.7%.
Final Judgment
CSX doesn’t pass our quality test. That said, the stock currently trades at 18.8× forward P/E (or $33.85 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. We’d suggest looking at one of our top digital advertising picks.
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