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3 Stocks to Watch From the Flourishing Railroad Industry
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The Zacks Transportation - Rail industry is suffering from headwinds like inflationary pressures, resultant high-interest rates, increased fuel prices and supply-chain disruptions.
Despite the challenges surrounding the industry, Canadian National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) and CSX Corporation (CSX - Free Report) appear better placed to tide over the challenges. Declining fuel costs represent a tailwind as far as bottom-line growth is concerned.
Industry Description
The Zacks Transportation - Rail industry includes railroad operators transporting freight (such as agricultural products, industrial products, coal, intermodal, automotive, consumer products, metals and minerals), primarily across North America. These companies focus on providing logistics and supply-chain expertise services. While freight constitutes a significant chunk of revenues, some of these companies also derive a small portion of their top line from other rail-related services, including third-party railcar and locomotive repairs, routine land sales and container sales, among others. A few companies offer service to multiple production and distribution facilities. Besides locomotives, some of these companies own equipment of leased locomotives, railcars, etc.
3 Factors Deciding the Industry's Outlook
Decline in Oil Priceis a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 10% in the period from October to December 2023. As fuel expenses represent a key input cost for any transportation player, the fall in oil prices bodes well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Agreed that signs of easing inflation have brought some sort of relief for U.S. stock markets but the fact remains that we are far from being out of the woods. Inflation is still above the Federal Reserve’s 2% target. The rise in inflation for December is a cause for concern and has once again dampened investors’ spirits, as they will once again try to gauge the Fed’s next course of action with interest rates. Rising inflation can turn markets more volatile in the coming days. Rising economic uncertainty does not bode well for shipping stocks.
Dividend Hikes Signal Financial Bliss: With the resumption of economic activities, many players, including some railroad companies, are reactivating shareholder-friendly measures like paying out dividends, which underline their solid financial footing and confidence in the business. For example, in 2023, CSX raised its dividend by 10% to 11 cents per share.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #108. This rank places it in the top 44% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that investors can retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has gained 4.2% compared with the S&P 500 Composite’s growth of 19.7%. The broader sector has increased 2% in the said time frame.
One-Year Price Performance
Industry;s Current Valuation
Based on the trailing 12-month price-to-book (P/B), a commonly used multiple for valuing railroad stocks, the industry is currently trading at 7.14X compared with the S&P 500’s 6.03X. It is also above the sector’s P/B ratio of 4.23X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 8.13X.
Canadian National: Based in Montreal, Canada, Canadian National is involved in rail and related transportation business. CNI’s efforts to reward its shareholders via dividends and buybacks are encouraging and highlight the company's financial strength. In January, the company announced an 8% dividend hike. Strong cash flow generating-ability supports Canadian National's shareholder-friendly activities. The company is also benefiting from higher export volumes of Canadian grain. CNI has surpassed the Zacks Consensus Estimate in one of the last four quarters (missing the mark in the other three).
Price and Consensus: CNI
Canadian Pacific: The company is being well-served by the uptick in revenues at key sub-groups like Grain, Potash, Forest products, Metals, minerals and consumer products, Automotive and Intermodal. We are encouraged by the Canadian Pacific’s decision to pay dividends even in the current uncertain scenario.
Canadian Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the other two).
Price and Consensus: CP
CSX: Based in Jacksonville, FL, CSX offers rail-based freight transportation services like traditional rail service, transport of intermodal containers and trailers apart from rail-to-truck transfers.
CSX’s top line is benefiting from higher export coal volumes, domestic intermodal shipments and volume growth in other segments, as well as pricing gains. High export coal prices and fuel surcharge revenues are expected to bolster the top line in the near term. CSX is trying to drive growth by reducing operating expenses. Efforts to reward its shareholders also bode well.
CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in two of the past four quarters (in line with the mark in the remaining two quarters), with an average beat of 4.64%.
Price and Consensus: CSX
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3 Stocks to Watch From the Flourishing Railroad Industry
The Zacks Transportation - Rail industry is suffering from headwinds like inflationary pressures, resultant high-interest rates, increased fuel prices and supply-chain disruptions.
Despite the challenges surrounding the industry, Canadian National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) and CSX Corporation (CSX - Free Report) appear better placed to tide over the challenges. Declining fuel costs represent a tailwind as far as bottom-line growth is concerned.
Industry Description
The Zacks Transportation - Rail industry includes railroad operators transporting freight (such as agricultural products, industrial products, coal, intermodal, automotive, consumer products, metals and minerals), primarily across North America. These companies focus on providing logistics and supply-chain expertise services. While freight constitutes a significant chunk of revenues, some of these companies also derive a small portion of their top line from other rail-related services, including third-party railcar and locomotive repairs, routine land sales and container sales, among others. A few companies offer service to multiple production and distribution facilities. Besides locomotives, some of these companies own equipment of leased locomotives, railcars, etc.
3 Factors Deciding the Industry's Outlook
Decline in Oil Priceis a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 10% in the period from October to December 2023. As fuel expenses represent a key input cost for any transportation player, the fall in oil prices bodes well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Agreed that signs of easing inflation have brought some sort of relief for U.S. stock markets but the fact remains that we are far from being out of the woods. Inflation is still above the Federal Reserve’s 2% target. The rise in inflation for December is a cause for concern and has once again dampened investors’ spirits, as they will once again try to gauge the Fed’s next course of action with interest rates. Rising inflation can turn markets more volatile in the coming days. Rising economic uncertainty does not bode well for shipping stocks.
Dividend Hikes Signal Financial Bliss: With the resumption of economic activities, many players, including some railroad companies, are reactivating shareholder-friendly measures like paying out dividends, which underline their solid financial footing and confidence in the business. For example, in 2023, CSX raised its dividend by 10% to 11 cents per share.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #108. This rank places it in the top 44% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that investors can retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has gained 4.2% compared with the S&P 500 Composite’s growth of 19.7%. The broader sector has increased 2% in the said time frame.
One-Year Price Performance
Industry;s Current Valuation
Based on the trailing 12-month price-to-book (P/B), a commonly used multiple for valuing railroad stocks, the industry is currently trading at 7.14X compared with the S&P 500’s 6.03X. It is also above the sector’s P/B ratio of 4.23X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 8.13X.
3 Stocks to Keep a Tab on
All three stocks mentioned below carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Canadian National: Based in Montreal, Canada, Canadian National is involved in rail and related transportation business. CNI’s efforts to reward its shareholders via dividends and buybacks are encouraging and highlight the company's financial strength. In January, the company announced an 8% dividend hike. Strong cash flow generating-ability supports Canadian National's shareholder-friendly activities. The company is also benefiting from higher export volumes of Canadian grain. CNI has surpassed the Zacks Consensus Estimate in one of the last four quarters (missing the mark in the other three).
Price and Consensus: CNI
Canadian Pacific: The company is being well-served by the uptick in revenues at key sub-groups like Grain, Potash, Forest products, Metals, minerals and consumer products, Automotive and Intermodal. We are encouraged by the Canadian Pacific’s decision to pay dividends even in the current uncertain scenario.
Canadian Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the other two).
Price and Consensus: CP
CSX: Based in Jacksonville, FL, CSX offers rail-based freight transportation services like traditional rail service, transport of intermodal containers and trailers apart from rail-to-truck transfers.
CSX’s top line is benefiting from higher export coal volumes, domestic intermodal shipments and volume growth in other segments, as well as pricing gains. High export coal prices and fuel surcharge revenues are expected to bolster the top line in the near term. CSX is trying to drive growth by reducing operating expenses. Efforts to reward its shareholders also bode well.
CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in two of the past four quarters (in line with the mark in the remaining two quarters), with an average beat of 4.64%.
Price and Consensus: CSX