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Factors that Could Hinder the Railroad Industry Upturn
There is no doubt that the new tax law has been a big positive for railroads and should be instrumental in driving growth for the industry. The new tax law apart, other factors like a buoyant U.S. economy and intermodal growth act as major tailwinds for this key sector.
These positives notwithstanding, there are a few factors that raise concerns for railroads. Let’s dig deep on the subject.
Sluggish Automotive Production – A Key Challenge
Weakness in the automotive sector has been hurting railroads for quite some time, with domestic production declining substantially. The scenario was not vastly different in the final quarter of 2017 as well. Results of major railroad operators like Union Pacific Corporation and Norfolk Southern Corporation were hurt by soft automotive volumes.
What’s worse is that the situation is unlikely to improve in the current year.
Union Pacific on its fourth-quarter conference call said that light vehicle sales for full-year 2018 are projected at 16.9 million units, reflecting a 2% decline from the 2017 levels. Norfolk Southern, meanwhile, said that it expects automotive volume to lag vehicle production in the United States.
These disappointing commentaries on the automotive sector do not bode well for railroads. As a significant portion of revenues is accounted for by this key sector, weakness pertaining to automotive production in the United States is a major headwind for railroads.
Service Issues
CSX Corporation was plagued by service disruptions last year, which severely dented its operations. However, the railroad took measures to combat the issue. The Precision Scheduled Railroading system, implemented by the company's former CEO, E. Hunter Harrison, seems to be paying off. The system generated efficiency-related savings to the tune of $460 million in 2017.
However, service issues now seem to be hurting Canadian railroad operator, Canadian National Railway Company. In fact, the company has been facing a number of challenges related to network congestion for the past few months, which have hurt its operational performance. Further, oilfield service major, Halliburton Company's statement issued in February 2018 that Canadian National’s service delays have been affecting its bottom line, underlines the gravity of this situation.
Canadian National announced a change at its helm, in March 2018, in order to primarily address the service issues. The new CEO (interim) has apologized to its customers for the service woes. He has promised an improvement on the service front. However, in the event of management change failing to yield the desired results, the stock would be hurt further.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Norfolk Southern, CSX, Union Pacific, Canadian National Railway and Halliburton
For Immediate Release
Chicago, IL – April 12, 2018 – Today, Zacks Equity Research discusses the Industrial Metals, including Norfolk Southern Corp. (NSC - Free Report) , CSX Corp. (CSX - Free Report) , Union Pacific Corporation (UNP - Free Report) , Canadian National Railway Company (CNI - Free Report) , Halliburton Company's (HAL - Free Report) .
Industry: Railroads, Part 3
Link: https://www.zacks.com/commentary/157608/factors-that-could-hinder-the-railroad-industry-upturn
Factors that Could Hinder the Railroad Industry Upturn
There is no doubt that the new tax law has been a big positive for railroads and should be instrumental in driving growth for the industry. The new tax law apart, other factors like a buoyant U.S. economy and intermodal growth act as major tailwinds for this key sector.
These positives notwithstanding, there are a few factors that raise concerns for railroads. Let’s dig deep on the subject.
Sluggish Automotive Production – A Key Challenge
Weakness in the automotive sector has been hurting railroads for quite some time, with domestic production declining substantially. The scenario was not vastly different in the final quarter of 2017 as well. Results of major railroad operators like Union Pacific Corporation and Norfolk Southern Corporation were hurt by soft automotive volumes.
What’s worse is that the situation is unlikely to improve in the current year.
Union Pacific on its fourth-quarter conference call said that light vehicle sales for full-year 2018 are projected at 16.9 million units, reflecting a 2% decline from the 2017 levels. Norfolk Southern, meanwhile, said that it expects automotive volume to lag vehicle production in the United States.
These disappointing commentaries on the automotive sector do not bode well for railroads. As a significant portion of revenues is accounted for by this key sector, weakness pertaining to automotive production in the United States is a major headwind for railroads.
Service Issues
CSX Corporation was plagued by service disruptions last year, which severely dented its operations. However, the railroad took measures to combat the issue. The Precision Scheduled Railroading system, implemented by the company's former CEO, E. Hunter Harrison, seems to be paying off. The system generated efficiency-related savings to the tune of $460 million in 2017.
However, service issues now seem to be hurting Canadian railroad operator, Canadian National Railway Company. In fact, the company has been facing a number of challenges related to network congestion for the past few months, which have hurt its operational performance. Further, oilfield service major, Halliburton Company's statement issued in February 2018 that Canadian National’s service delays have been affecting its bottom line, underlines the gravity of this situation.
Canadian National announced a change at its helm, in March 2018, in order to primarily address the service issues. The new CEO (interim) has apologized to its customers for the service woes. He has promised an improvement on the service front. However, in the event of management change failing to yield the desired results, the stock would be hurt further.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.