The Stock Bill Gates Loves

08/19/2011 9:00 am EST


Peter Cohan

President, Peter S. Cohan & Associates

A recent report revealed that Microsoft founder Bill Gates now owns a huge stake in railroad company CSX Corp. (CSX), and with its strong fundamentals and decent yield, investors may want to buy in as well.

Train transporter CSX Corp. (CSX) recently received a big investment from the world’s second-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 a recent report revealed that this stake was much bigger than before. Specifically, according to its Aug. 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 earnings per share (EPS) of 46 cents 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.

Here is a recent daily chart below. The stock has been hammered, like all equities, in recent weeks. Volatility remains a concern for all stock traders.

Click to Enlarge

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/earnings-to-growth (PEG) ratio 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 past five earnings reports

  • Decent dividend - CSX pays a fairly attractive 2.13% dividend yield

  • Out-earning 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 the first six months’ annualized 2011, using a 9% weighted average cost of capital

One reason to hesitate:

  • 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 past 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 trade, and at its current price, it appears worthy of investment by lesser mortals than Bill Gates.

By Peter Cohan of

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