Thursday, August 18, 2011

Join Bill Gates in Buying CSX

Train transporter, CSX Corp. (NYSE: CSX), recently received a big investment from the world's richest person -- Bill Gates. Does this mean you should let your portfolio take a ride on CSX?

The Bill & Melinda Gates Foundation already had a stake in CSX but in a recent report, revealed that this stake was much bigger than before. Specifically, according to its August 16 13F, the Gates Foundation boosted its stake by 188% to 4.6 million shares.

While it's hard to know exactly when that investment took place, there must be something going on in the last few months that has attracted that much larger investment stake in CSX. Certainly its second quarter earnings report was a good one. Its second quarter EPS of $0.46 beat analysts’ expectations by two cents and its $3 billion in revenues were $44 million higher than expectations.

What's driving CSX's growth is global demand for coal and auto parts that and a shift by producers of those commodities from expensive truck transportation to less expensive trains. For instance, CSX's international coal demand caused 15% revenue growth despite a 3% loss of volume and its industrial merchandise segment -- that includes auto parts -- enjoyed 11% revenue growth and a 3% volume increase, according to SeekingAlpha

Is this performance a good reason for you to buy CSX's shares or are its best days behind it? Here are four reasons to consider it:
  • Cheap stock. CSX's price to earnings to growth of 0.84 (where a PEG of 1.0 is considered fairly priced) means it is cheap. It currently has a P/E of 14.6 and is expected to grow earnings 17.3% to $2.04 in 2012.
  • Good quarterly earnings. CSX has been able to meet or surpass analysts’ expectations in all of its last five earnings reports.
  • Decent dividend. CSX pays a fairly attractive 2.13% dividend yield.
  • CSX is out-earning its cost of capital. CSX is earning more than its cost of capital – and it’s not progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, CSX's EVA momentum was 4%, based on first six months' annualized 2010 revenue of $10.3 billion, and EVA that rose from $1.7 billion in the first six months' annualized 2010 to $2.1 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital.
One reason to hesitate is CSX's rising sales and profits -- but more debt-laden balance sheet. CSX has been increasing sales and profits. Its $10.6 billion in revenues have increased at an average rate of 2.5% over the last five years while its net income of $1.6 billion has increased at a 5.3% annual rate -- yielding a solid 15% net profit margin.

Its debt has risen faster than its cash. Its debt has climbed at 10.7% annual rate from $5.4 billion (2006) to $8.1 billion (2010) while its cash increased at a 9.6% annual rate from $900 million to $1.3 billion during the period.

CSX looks like it should be a long-term holding -- and at its current price, appears worthy of investment by lesser mortals than Bill Gates.


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