Last night after the close rail company Norfolk Southern (NSC) pre-announced worse than expected Q1 results and guided down full year revenues. The stock is down nearly 6% today. The breakdown below $100 is important from a technical perspective as it is on large volume and below support that it has bounced from four times in the last year:
What’s clear from the two year chart (above) is that the stock has made a series of lower highs and lower lows since making a new all time high in late December. The stock’s inability to hold its long term uptrend, and keep pace with the broad market is troubling to some who subscribe to the Dow Theory.
Tomorrow morning we will get a quick confirmation whether or not NSC’s results and guidance are part of a trend as CSX Corp (CSX) is scheduled to report Q1 results. The options market is implying an almost 4.5% one day move which is well above the 4 qtr avg move of less than 1%. Shares of CSX have bounced today off of support at $32, which is important technical support:[caption id="attachment_52770" align="aligncenter" width="600"] CSX 1yr chart from Bloomberg[/caption]
Analysts expect CSX to deliver 10% eps growth this year, the highest level since 2011, doubling that of the last three years, despite no sales growth year over year. If the company does not lower forward guidance, then the stock, trading 15x expected eps growth of 10%, would look cheap. Especially when you consider the 2% dividend yield and no exposure to the strength of the U.S. dollar.
The options market appears to be pricing in the potential for a surprise from CSX. Even with the poor price action into the print for NSC, I think it is safe to say that the 6% decline in its shares today is a surprise. That stock on average had moved 1.75% over the last 4 quarters.
For those that think CSX could bounce on a beat and raise, short dated calls look dollar cheap. For instance the April 17th weekly 33 calls, offered at .47 with the stock $32.65, could be a way to offer leverage to an existing long, or defined risk to play for a bounce of less than the implied move as their break-even is up only 2.5%. On the flip side the April 17th weekly 32 puts offered at .36 looks like a reasonable way to play for a move lower, or possibly dollar cheap protection against a long stock position.