Why We Expect CSX Stock To Steam Ahead Of Its Larger Peer

Given its better valuation, we believe CSX stock (NYSE: CSX) is a better pick than its peer Union Pacific stock (NYSE: UNP). CSX stock trades at 4.5x trailing revenues, versus 6.3x for UNP. Although CSX has seen better revenue growth, UNP is more profitable, largely explaining this valuation gap. However, we think this gap will narrow in favor of CSX over the coming years. There is more to the comparison, and in the sections below, we discuss why we think CSX will outperform UNP in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of CSX vs. Union Pacific: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Returns For UNP Stock Have Been Better Than For CSX

CSX stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, while UNP stock has shown gains of 30% from levels of $195 to around $250 over this period. This compares with an increase of about 50% for the S&P 500 over the same period.

However, the increase in CSX and UNP stocks has been far from consistent. Returns for CSX stock were 26% in 2021, -17% in 2022, and 14% in 2023, while for UNP stock were 23%, -16%, and 22%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that both CSX and UNP underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including CUK, HUBG, and GOGO, and even for the megacap stars GOOG, TSLA, and MSFT.  In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. CSX’s Revenue Growth Is Much Better 

CSX has seen its revenue rise at an average annual rate of 11.9% from $10.6 billion in 2020 to $14.7 billion in 2023. CSX has benefited from strong pricing gains and higher fuel surcharge revenues over recent years. The company saw double-digit pricing gains across segments. While average revenue per unit rose 18% for Merchandise and 19% for Intermodal, it was up a significant 50% for Coal freight over the last three years. Furthermore, the company saw a massive 3.6x rise in Trucking & Other revenues, primarily due to its 2021 acquisition of Quality Carriers – a trucking company focused on the bulk transportation of liquid chemicals.

Looking at Union Pacific, it has seen its revenue rise at an average annual rate of 7.6% from $19.5 billion in 2020 to $24.1 billion in 2023. This can be attributed to a recovery in demand after the pandemic-induced lockdowns. Furthermore, the company realized substantial pricing gains, passing on the higher costs and higher fuel prices to the customers. For perspective, the company’s average revenue per carload grew 18% between 2020 and 2023, while its total carload volume was up just 5%.

Our CSX Revenue Comparison and Union Pacific Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we think Union Pacific will see its top-line expand at a low single-digit average annual rate, due to a weakening consumer demand environment, while volume growth remains soft. A weakening of coal export pricing lately is also hurting the top-line growth for railroad companies at large. With CSX’s exposure to the trucking business and higher reliance on merchandise freight, we think it will see better revenue growth in the coming years.

3. Union Pacific Is Slightly More Profitable 

CSX’s operating margin has contracted from 41.3% in 2020 to 37.9% in 2023, while Union Pacific’s operating margin has declined from 40.1% to 37.7% over the same period. Looking at the last twelve-month period, Union Pacific’s operating margin of 38.7% fares slightly better than 37.2% for CSX. While both companies were focused on improving their margins, an overall increase in labor costs since the pandemic and higher fuel prices weighed on the margin profile.

4. Union Pacific Fares Better In Terms of Financial Risk

Looking at financial risk, we believe Union Pacific has a slight edge over CSX. Its 22% debt as a percentage of equity is lower than 29% for CSX, but its 2% cash as a percentage of assets is marginally below 3% for the latter. This implies that Union Pacific has a better debt position, but CSX has a slightly better cash cushion.

5. The Net of It All

We see that CSX has seen better revenue growth and has more cash cushion. On the other hand, Union Pacific is more profitable and has a better debt position. Now, looking at the prospects, we believe CSX is the better choice of the two. At its current levels, CSX stock is trading at 17x its expected earnings of $1.94 per share in 2024. The 17x figure is slightly below the stock’s average P/E ratio of 18x over the last five years. In comparison, Union Pacific stock is trading at 22x its expected earnings of $11.07 in 2024. The 22x figure aligns with the stock’s average P/E ratio over the last five years. This implies that CSX stock has some room to grow, while UNP stock looks appropriately priced, in our view.

While CSX may outperform UNP in the next three years, it is helpful to see how CSX’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/27/2024
[2] Cumulative total returns since the end of 2016

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