CSX Corporation (NASDAQ:CSX) and Trinity Industries, Inc. (NYSE:TRN) are the two most active stocks in the Railroads industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CSX to grow earnings at a 15.80% annual rate over the next 5 years. Comparatively, TRN is expected to grow at a 10.00% annual rate. All else equal, CSX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. CSX Corporation (CSX) has an EBITDA margin of 38.87%, compared to an EBITDA margin of 22.98% for Trinity Industries, Inc. (TRN). This suggests that CSX underlying business is more profitable. CSX’s ROI is 9.80% while TRN has a ROI of 7.70%. The interpretation is that CSX’s business generates a higher return on investment than TRN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CSX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.19. Comparatively, TRN’s free cash flow per share was -0.19. On a percent-of-sales basis, CSX’s free cash flow was -1.57% while TRN converted -0.63% of its revenues into cash flow. This means that, for a given level of sales, TRN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CSX’s debt-to-equity ratio is 1.02 versus a D/E of 0.83 for TRN. CSX is therefore the more solvent of the two companies, and has lower financial risk.
CSX trades at a forward P/E of 19.32, a P/B of 4.16, and a P/S of 4.10, compared to a forward P/E of 28.98, a P/B of 1.33, and a P/S of 1.31 for TRN. CSX is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CSX is currently priced at a -8.83% to its one-year price target of $57.42. Comparatively, TRN is 20.03% relative to its price target of $29.21. 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 2.00 for CSX and 2.40 for TRN, which implies that analysts are more bullish on the outlook for TRN.
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 1.35 and TRN’s beta is 2.17. CSX’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 3.27 compared to a short interest of 7.19 for TRN. This implies that the market is currently less bearish on the outlook for CSX.
CSX Corporation (NASDAQ:CSX) beats Trinity Industries, Inc. (NYSE:TRN) on a total of 8 of the 13 factors compared between the two stocks. CSX is growing fastly, is more profitable and generates a higher return on investment. CSX is more undervalued relative to its price target. Finally, CSX has better sentiment signals based on short interest.