CSX Corporation (NASDAQ:CSX) and Kansas City Southern (NYSE:KSU) are the two most active stocks in the Railroads industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

**Growth**

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CSX to grow earnings at a 15.10% annual rate over the next 5 years. Comparatively, KSU is expected to grow at a 12.86% annual rate. All else equal, CSX’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. CSX Corporation (CSX) has an EBITDA margin of 38.87%, compared to an EBITDA margin of 48.9% for Kansas City Southern (KSU). This suggests that KSU underlying business is more profitable. CSX’s ROI is 9.80% while KSU has a ROI of 9.70%. The interpretation is that CSX’s business generates a higher return on investment than KSU’s.

**Cash Flow **

If there’s one thing investors care more about than earnings, it’s cash flow. CSX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.19. Comparatively, KSU’s free cash flow per share was +0.99. On a percent-of-sales basis, CSX’s free cash flow was -1.57% while KSU converted 4.47% of its revenues into cash flow. This means that, for a given level of sales, KSU is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios are important because they reveal the financial health of a company. CSX has a current ratio of 1.60 compared to 0.90 for KSU. This means that CSX can more easily cover its most immediate liabilities over the next twelve months. CSX’s debt-to-equity ratio is 1.02 versus a D/E of 0.62 for KSU. CSX is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

CSX trades at a forward P/E of 17.93, a P/B of 3.89, and a P/S of 3.89, compared to a forward P/E of 17.54, a P/B of 2.59, and a P/S of 4.39 for KSU. CSX is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CSX is currently priced at a -15.11% to its one-year price target of $57.71. Comparatively, KSU is -8.49% relative to its price target of $112.25. This suggests that CSX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for CSX and 2.50 for KSU, which implies that analysts are more bullish on the outlook for KSU.

**Risk and Volatility**

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CSX has a beta of 1.30 and KSU’s beta is 0.79. KSU’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CSX has a short ratio of 2.92 compared to a short interest of 1.01 for KSU. This implies that the market is currently less bearish on the outlook for KSU.

**Summary**

Kansas City Southern (NYSE:KSU) beats CSX Corporation (NASDAQ:CSX) on a total of 8 of the 14 factors compared between the two stocks. KSU is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, KSU is the cheaper of the two stocks on an earnings and book value, Finally, KSU has better sentiment signals based on short interest.