Readers of this space know that one of the preferred sectors is the railroad sector. Time was -- just a short time ago -- the railroads were the darlings of Wall Street. Extraordinary demand for commodities from emerging markets and strong international trade increased demand for rail transport. But then came the winds of September/October 2008: a financial crisis and the ensuing global recession stopped both commodity demand and trade nearly cold, and Wall Street soon soured on the railroads, including CSX Corporation (NYSE: CSX). In the panic and fear that occurred, the Street drove CSX's shares down to about $20 per share from over $70 in less than eight months. Talk about irrational behavior.
True, CSX's revenue, like most railroads, is expected to decline in FY 2009, but the view from here argues a slightly longer time frame yields a different picture. Improvements in operating efficiency, widening margins due to lower fuel costs, impressive contract renewals, and a diverse customer base tip the balance in favor of a Buy.
Further, a p/e of 10 means the potential upside is large; but risks do exist: a failure of the U.S./global economy to start to recover by the end of 2009 would weigh on CSX's results, and keep the company's shares treading at low levels. But the sense here is that we will see a U.S. economic bottom by the end of Q3, followed by a global recovery shortly thereafter. The First Call FY 2009 /FY 2010 EPS estimates for CSX are $2.89 to $3.20.
Stock Analysis: CSX Corp. is a moderate-risk stock. Consider buying a 25% position in CSX now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CSX position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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