CSX Corporation (CSX) Could Become One of Warren Buffett’s Favorites (Part 6)

CSX Corporation (NYSE:CSX)In the search for long-term investment opportunities, I am quite interested in the sustainable businesses that are cheaply or reasonably valued on the stock market. Using StarMine data, Thompson Reuters’ senior analyst John Kozey listed 28 businesses that could become one of Warren Buffett’s favorites. In this article, I will cover one industrial company on that list. It is CSX Corporation (NYSE:CSX), a transportation service company.

Business snapshot

CSX is considered to be one of the U.S. leading transportation companies, providing different transportation services such as traditional rail service, intermodal containers transport and trailer transport. CSX is operating in three main business segments including the merchandise business, the coal business and the intermodal business. The majority of 2012 revenue, $6.7 billion, or 57% of the total revenue, was generated from the merchandise business, which transported around 42% of the total 2012 volume of the company. The coal business ranked second, with $3.17 billion in revenue, or 27% of the total 2012 revenue while the intermodal business generated about $1.64 in revenue.

A cyclical business that is improving

The transportation business is quite cyclical, meaning that the business fluctuates along with the ups and downs of the overall economy. Indeed, CSX Corporation (NYSE:CSX) experienced a significant drop in both revenue and income in 2009, followed by steady improvement since 2010.



CSX Revenue TTM data byYCharts

As the general economy improves, its top and bottom lines exceeded those levels reached in 2008. Compared to 2008, the revenue has increased by 13.9% while the net income has risen by 28.5%, due in large part to lower operating expenses. Since 2008, its operating ratio has been declining. The operating ratio equals annual operating expenses divided by annual revenue, excluding non-recurring items. For the past five years, its operating ratio dropped from 75.6% to only 70.6%. Furthermore, income investors would like CSX a lot due to its consistent increasing dividends. In the past ten years, its dividend has increased from $.07 in 2003 to $.54 in 2012. The dividend yield is currently staying at 2.14%.

Historically, CSX has consistently generated positive cash flow. In 2012, the operating cash flow was $2.95 billion and the free cash flow was $605 million. The consistent cash flow allows the business to leverage substantially. As of December 2012, it had nearly $9 billion in total stockholders’ equity, $1.37 billion in cash and short-term investments and more than $9.8 billion in debt. In addition, CSX Corporation (NYSE:CSX) had more than $8 billion in deferred tax liabilities, which are considered interest-free loans from the government.

Peer comparison

CSX is trading around $23 per share, with a total market cap of around $23.5 billion. The market is valuing CSX at nearly 7.1 times EV/EBITDA. Compared to its peers including Norfolk Southern Corp. (NYSE:NSC) and Union Pacific Corporation (NYSE:UNP), CSX has the cheapest valuation. Norfolk Southern, with a trading price of nearly $75 per share, is worth around $23.5 billion on the market. The market values the company at 7.84 times EV/EBITDA. Union Pacific is the biggest company among the three, with a total market cap of more than $65 billion. At $138 per share, Union Pacific is valued the most expensive, at nearly 8.6 times EV/EBITDA.

Union Pacific seems to deserve a higher valuation than the other two, thanks to its higher profitability. Its operating margin is the highest at 32% while the operating margins of CSX Corporation (NYSE:CSX) and Norfolk Southern are 29% and 28%, respectively. Among the three, Norfolk Southern pays the highest dividend yield at 2.6% while Union Pacific pays the lowest yield at 1.9%.

Foolish bottom line

With a high operating margin, improving operating performance, consistent cash flow and dividends, and reasonable valuation, CSX could be considered a good long-term stock to hold for income investors.

The article This Company Could Become One of Warren Buffett’s Favorites (Part 6) originally appeared on Fool.com and is written by  Anh HOANG.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!