CSX Corporation (CSX) is trading lower on Friday after beating fourth quarter 2020 top- and bottom-line estimates, reporting a profit of $1.04 per share on a 2.1% decline in revenue to $2.83 billion. Coal took a big hit in 2020, weighing on shipping volume already lowered by the COVID-19 pandemic. The Florida-based railroad operates 20,000 route miles in 23 states east of the Mississippi River, primarily in population centers.

Kansas City Southern (KSU) posted an equally mixed report in the pre-market, booking a profit of $1.89 per share, $0.03 worse than estimates. Revenue fell 4.9% year over year to $693.4 million, also worse than expectations. This north-south railroad operator usually benefits from heavy cross-border traffic, but the pandemic has also taken a toll on Mexican and Canadian economies, lowering shipping volumes.

Key Takeaways

  • CSX and Kansas City Southern reported quarterly revenue declines.
  • Both stocks are trading close to all-time highs in anticipation of strong second half recoveries.
  • CSX has failed a January breakout, waving a red flag for the railroad sector.

Quarterly revenue declines matched Union Pacific Corporation's (UNP) fourth quarter report last week, highlighting the transportation sector's vulnerability to economic upturns and downturns. However, all three stocks are trading near all-time highs despite those results, with investors looking ahead and expecting that economic growth will surge in the second half as the pandemic runs its course.

Tip

A cyclical stock is a stock whose price is affected by macroeconomic or systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery. Most cyclical stocks involve companies that sell consumer discretionary items that consumers buy more during a booming economy but spend less on during a recession.

CSX Daily Chart (2018–2021)

Chart showing the share price performance of CSX Corporation (CSX)

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A powerful uptrend topped out in the mid-$70s in the summer of 2018, giving way to range-bound action that featured two failed breakout attempts into February 2020. The stock undercut the 2018 low at $58.47 into March, coming to rest at a three-year low in the mid-$40s. The subsequent recovery wave completed a round trip into the first quarter peak in September, ahead of a November breakout that reached $93.70 a few sessions later.

The stock then eased into a trading range, breaking out once again at the start of January. However, it has been pulling back since topping out on Jan. 11 and has dropped into the upper $80s, signaling a failed breakout. The decline has also reached the 50-day exponential moving average (EMA), which should act as support for the second time in three weeks. Sell signals will erupt if this level breaks, setting the stage for downside into the 200-day EMA near $80.

Kansas City Southern Weekly Chart (2013–2021)

Chart showing the share price performance of Kansas City Southern (KSU)

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A multi-year uptrend topped out above $125 in 2013, giving way to a broad double top pattern that broke to the downside in 2015. Selling pressure ended at a four-year low in the first quarter of 2016, yielding a slow-motion uptick that finally completed a round trip into the prior high in August 2019. The stock broke out in October and topped out at $178 in February 2020, just ahead of a vertical decline that failed the breakout.

The subsequent recovery wave reached the first quarter peak in July, triggering an immediate breakout that stalled quickly near $190. The stock broke out once again at year-end and added more than 10% into the Jan. 8 all-time high at $222.63. It is trading about six points below that level ahead of Friday's opening bell, but the mixed quarter isn't likely to attract the firepower needed to power a rally to a new high.

Tip

A sell signal is a condition or measurable level at which an investor is alerted to sell a specified investment. Sell signals can be generated through a variety of methods, such as a pre-determined percentage decline in the asset's value, a technical indicator, fundamental change in the asset, or a trailing stop-loss. The sell signal may automatically close the trade, like in the case of a stop-loss order, or investors and traders may need to manually close the position after receiving the sell signal from their method or strategy.

The Bottom Line

CSX and Kansas City Southern confirmed a mixed quarter for the railroad sector, with pandemic headwinds still affecting shipping volumes.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.