CSX Corporation (CSX) in Jacksonville, Fla., and Canadian Pacific Railway Limited (CP), which is headquartered in Calgary, Canada, are two prominent players in the railroad industry. CSX provides rail, intermodal, domestic container shipping, barging, and contract logistics services worldwide. It transports chemicals, minerals, agricultural and food products, coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, industrial plants, and exports coal to deep-water port facilities. CP is a Class 1 transcontinental railway that provides freight and intermodal services over a network in Canada and the United States. It transports bulk commodities, merchandise freight, and intermodal traffic that comprises retail goods in overseas containers.
The gradual easing of COVID-19 restrictions and the resumption of economic and industrial activities have helped the railroad industry recover from its pandemic lows. Because the demand for transportation remains high amid current supply chain disruptions and rising oil prices, fuel-efficient rail and intermodal services should gain importance. Moreover, increasing investments to improve rail infrastructure bodes well for the industry. The global rail market is expected to grow at a 4.5% CAGR to $820 million in 2024. So, both CSX and CP are expected to benefit.
While CP’s shares have gained 3.6% in price over the past three months, CSX surged 8.5%. CSX is a clear winner with 23.3% gains versus CP’s 10.4% returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let’s find out.
On October 8, 2021, CSX launched its Responder Incident Training (RIT) Train, a new leading-edge train designed to deliver advanced, tailored hazardous materials safety training events for emergency first responders throughout its 23-state network. This RIT train will allow CSX to expand the reach of its safety program and strengthen its partnerships with emergency personnel. This represents one of CSX’s efforts to become the best railroad in North America.
On September 15, 2021, CP agreed to acquire Kansas City Southern (KSU), an American Class I railroad, for approximately $31 billion. The combined company becomes the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver expanded market reach to its customers, provide new competitive transportation options, and support North American economic growth. The combined company expects to create annualized synergies of approximately $1 billion over three years by providing improved service and efficiency across its networks.
Recent Financial Results
CSX’s revenue for its fiscal third quarter, ended September 30, 2021, increased 24.3% year-over-year to $3.29 billion. The company’s operating income came in at $1.44 billion, up 25.9% from the prior-year period. While its net earnings increased 31.5% year-over-year to $968 million, its EPS increased 34.4% to $0.43. As of September 30, 2021, the company had $2.18 billion in cash and cash equivalents.
For its fiscal third quarter, ended September 30, 2021, CP’s revenue increased 4.2% year-over-year to CAD1.94 billion ($1.56 billion). The company’s adjusted operating income came in at CAD789 million ($635.03 million), up 1.3% from the prior-year period. CP’s adjusted net income was t CAD592 million ($476.47 million), indicating a 5.7% rise from the year-ago period. Its adjusted EPS increased 7.3% year-over-year to CAD0.88. The company had CAD210 million ($169.02 million) in cash and cash equivalents as of September 30, 2021.
Past and Expected Financial Performance
CSX’s EBIT and total assets have grown at CAGRs of 3.8% and 2.9%, respectively, over the past three years. The company’s levered free cash flow grew at an 8.1% CAGR over the past three years.
Analysts expect CSX’s EPS to increase 28.1% year-over-year in the current year and 14.8% next year. They expect its revenue to increase 17.4% year-over-year in the current year and 9.3% next year. And the company’s EPS is expected to grow at a 15.7% rate per annum over the next five years.
In comparison, CP’s EBIT and total assets have increased at CAGRs of 8.4% and 7.8%, respectively, over the past three years. The company’s levered free cash flow has grown at a 28.2% CAGR over the past three years.
CP’s EPS is expected to rise 12.8% year-over-year in the current year and 9.1% next year. Its revenue is expected to rise 7.2% year-over-year in the current year and next year. And the stock’s EPS is expected to grow at a 9.2% rate per annum over the next five years.
In terms of non-GAAP forward PEG, CP is currently trading at 2.39x, which is 50.3% higher than CSX’s 1.59x. In terms of forward EV/Sales, CSX’s 7.56x compares with CP’s 8.91x.
CSX’s trailing-12-month revenue is almost 1.8 times higher than CP’s. However, CP is more profitable, with a 57.5% EBITDA margin versus CSX’s 54.7%.
Also, CP’s 36.6%, 9.5%, and 12.7% respective ROE, ROA, and ROTC values compare favorably with CSX’s 27.9%, 8%, and 10.7%.
While CSX has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CP has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both CSX and CP have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. CSX’s 54.7% trailing-12-month EBITDA margin is 305.8% higher than the 13.5% industry average. CP has a trailing-12-month EBITDA margin of 57.5%, which is 326.3% higher than the 13.5% industry average.
CSX has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. CSX has a 15.61x forward Price/Cash Flow, which is 2.5% higher than the 15.23x industry average. CP’s D grade for Value reflects its overvaluation. Its 17.83x forward Price/Cash Flow is 17% higher than the 15.23x industry average.
Of the 16 stocks in the C-rated Railroads industry, CP is ranked #14, while CSX is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has also rated CSX and CP for Growth, Stability, Momentum, and Sentiment. Get all CP ratings here. Also, click here to see the additional POWR Ratings for CSX.
Because the railroad industry is well-positioned to grow, both CSX and CP should benefit. However, a relatively lower valuation makes CSX a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Railroads industry.
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CSX shares were trading at $36.00 per share on Wednesday afternoon, up $0.31 (+0.87%). Year-to-date, CSX has gained 19.81%, versus a 23.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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