Shares of CSX Corp. Overbought

We are maintaining our Sell rating on CSX Corporation (CSX - Snapshot Report) due to valuation. We believe the shares have been overbought and that CSX is expensive on a fundamental basis.

CSX will report second quarter results on July 15. We are retaining our 2008 EPS estimate at $3.55, near the top of CSX guidance of $3.40-3.60, as well as our 2009 estimate at $4.00. Improved efficiency, strong yields, and share buybacks should offset weakening volumes from a slowing economy and higher fuel costs.

CSX reported a strong first quarter, with EPS before nonrecurring items up 60% year over year to $0.80, largely due to better-than-expected revenue growth. Results of the June 25 board election will be announced on July 25, though two activist funds claim they’ve won four seats on the board of directors. CSX just increased the dividend 22%.

CSX has planned to expand in two key corridors: the Southeastern corridor and the I-90 corridor. Over the next year, CSX will complete around 60 projects. A key driver for CSX’s future performance will be the degree to which ONE PLAN succeeds. The program should reduce the operating ratio to the low 70% level by 2010 from 77.8% in 2007.

At its current price, CSX’s stock is trading at 7-9% premiums to the industry median and a 16% premium based upon price/book. CSX’s projected EPS growth rate of 16% is above the median for the industry, while its dividend yield matches the median. CSX’s balance sheet, profitability, and operating margin are below average. Our $56 target price represents roughly a 14X P/E, based upon our 2009 EPS estimate of $4.00 per diluted share, matching the industry median.

Read the full analyst report on CSX