CSX Corporation (NASDAQ:CSX) shares are down more than -3.36% this year and recently increased 4.46% or $2.27 to settle at $53.16. Union Pacific Corporation (NYSE:UNP), on the other hand, is down -4.07% year to date as of 02/12/2018. It currently trades at $128.64 and has returned 3.62% during the past week.
CSX Corporation (NASDAQ:CSX) and Union Pacific Corporation (NYSE:UNP) are the two most active stocks in the Railroads industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CSX to grow earnings at a 16.91% annual rate over the next 5 years. Comparatively, UNP is expected to grow at a 18.48% annual rate. All else equal, UNP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 50.96% for Union Pacific Corporation (UNP). CSX’s ROI is 22.60% while UNP has a ROI of 13.60%. The interpretation is that CSX’s business generates a higher return on investment than UNP’s.
Cash is king when it comes to investing. CSX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, UNP’s free cash flow per share was +0.55. On a percent-of-sales basis, CSX’s free cash flow was -1.24% while UNP converted 2.04% of its revenues into cash flow. This means that, for a given level of sales, UNP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. CSX has a current ratio of 1.00 compared to 1.20 for UNP. This means that UNP can more easily cover its most immediate liabilities over the next twelve months. CSX’s debt-to-equity ratio is 0.80 versus a D/E of 0.88 for UNP. UNP is therefore the more solvent of the two companies, and has lower financial risk.
CSX trades at a forward P/E of 14.73, a P/B of 3.24, and a P/S of 4.13, compared to a forward P/E of 15.28, a P/B of 5.34, and a P/S of 4.81 for UNP. CSX is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CSX is currently priced at a -16.34% to its one-year price target of 63.54. Comparatively, UNP is -11.36% relative to its price target of 145.12. 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 2.20 for CSX and 2.30 for UNP, which implies that analysts are more bullish on the outlook for UNP.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CSX has a beta of 1.27 and UNP’s beta is 0.83. UNP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CSX has a short ratio of 1.76 compared to a short interest of 2.35 for UNP. This implies that the market is currently less bearish on the outlook for CSX.
CSX Corporation (NASDAQ:CSX) beats Union Pacific Corporation (NYSE:UNP) on a total of 8 of the 14 factors compared between the two stocks. CSX generates a higher return on investment and has lower financial risk. In terms of valuation, CSX is the cheaper of the two stocks on an earnings, book value and sales basis, CSX is more undervalued relative to its price target. Finally, CSX has better sentiment signals based on short interest.