Earnings

Critical Comparison: CSX Corporation (CSX) vs. Union Pacific Corporation (UNP)

CSX Corporation (NASDAQ:CSX) shares are up more than 41.00% this year and recently decreased -0.47% or -$0.24 to settle at $50.66. Union Pacific Corporation (NYSE:UNP), on the other hand, is up 13.00% year to date as of 11/27/2017. It currently trades at $117.16 and has returned 1.32% 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. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CSX to grow earnings at a 15.81% annual rate over the next 5 years. Comparatively, UNP is expected to grow at a 13.29% annual rate. All else equal, CSX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 50.96% for Union Pacific Corporation (UNP). CSX’s ROI is 9.80% while UNP has a ROI of 13.60%. The interpretation is that UNP’s business generates a higher return on investment than CSX’s.

Cash Flow 




Cash is king when it comes to investing. CSX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.67. Comparatively, UNP’s free cash flow per share was +0.84. On a percent-of-sales basis, CSX’s free cash flow was 5.41% while UNP converted 3.32% of its revenues into cash flow. This means that, for a given level of sales, CSX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. 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 1.08 versus a D/E of 0.88 for UNP. CSX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CSX trades at a forward P/E of 18.82, a P/B of 4.20, and a P/S of 3.92, compared to a forward P/E of 18.06, a P/B of 4.86, and a P/S of 4.39 for UNP. 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CSX is currently priced at a -12.53% to its one-year price target of 57.92. Comparatively, UNP is -4.66% relative to its price target of 122.89. 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 2.40 for UNP, which implies that analysts are more bullish on the outlook for UNP.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CSX has a beta of 1.32 and UNP’s beta is 0.86. UNP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CSX has a short ratio of 2.85 compared to a short interest of 2.79 for UNP. This implies that the market is currently less bearish on the outlook for UNP.

Summary

Union Pacific Corporation (NYSE:UNP) beats CSX Corporation (NASDAQ:CSX) on a total of 8 of the 14 factors compared between the two stocks. UNP is growing fastly, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, UNP has better sentiment signals based on short interest.

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