The Best Price To Buy CSX May Be In The Low-$20s
Walt Liptak of Seaport Global initiated coverage of CSX Corporation (NASDAQ: CSX) with a Neutral rating and $31 price target, which represents a 16x multiple to his 2017 earnings per share estimate of $1.95 per share.
Liptak noted that from a historical perspective, the stock has traded at an average forward multiple of 12.9x, as low as 5.9x and as high as 17.5x. The analyst justified his use of a higher-than-average multiple to reflect the likelihood of improving volumes, especially in the higher-margin coal segment. In addition, several years of cost cutting initiatives should boost its incremental margins higher when the company sees strong demand return.
However, Liptak cautioned investors to wait for a pullback from current levels before buying. Specifically, the analyst suggested investors buy the stock when it is trading in the low- to mid-$20s and sell it in the upper $20s or low $30s.
Looking forward, Liptak is hopeful that CSX will release a game-plan for its future that discusses how it will improve its operating ratio into the mid-60s from its current level of around 70 percent. Other encouraging data points include a stronger outlook for domestic/export met coal, easy first half comparisons and capital expenditure levels that likely reached their peak level.
On the other hand, the analyst noted that these favorables are offset by a decline in productivity savings from $400 million in 2016 to $150 million in 2017 and the potential for weak pricing due to excess truckload capacity.
Bottom line, Liptak’s worst case sceanrio applied to the stock’s average multiple derives a $22 price target while the most bullish case scenario yields a $38 price target — a profile that isn’t attractive to justify accumulating the stock at current levels.
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