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3 Railroad Stocks to Watch Amid the Industry Weakness
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Prospects of Zacks Transportation - Rail industry’s participants are being dented due to challenges like inflation-induced high interest rates, elevated fuel price and supply-chain woes. Most industry players are looking to drive their bottom line amid the headwinds through cost reduction.
Despite the challenges surrounding the industry, Union Pacific Corporation (UNP - Free Report) , CSX Corporation (CSX - Free Report) and Norfolk Southern Corporation (NSC - Free Report) appear better-placed to tide over the challenges.
About the Industry
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.
Factors Relevant to the Industry's Fortunes
Focus on Cost Cuts to Drive the Bottom Line: The industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The industry players are focusing on cost-cutting measures and making efforts to improve productivity and efficiency to mitigate high expenses and the effects of a weaker-than-expected demand scenario.
Economic Uncertainty: Despite a strong performance by major indices lately, the fact remains that we are by no means out of the woods, especially with respect to inflation-related woes. The recent production cut by the OPEC+ oil cartel, which includes OPEC members plus Russia, has led to a surge in oil prices. This may aggravate inflationary pressure and result in heightened economic uncertainty and market volatility. The turmoil in the banking sector — popularly known as the engine of economic growth — also does not bode well.
Weak Freight Demand: Risks associated with an economic slowdown, geopolitical tensions and supply-chain woes dampen the prospects of stocks belonging to this industrial cohort. Due to the uncertainty, the Cass Freight Index declined 1% on a month-on-month basis in March. In fact, the index has declined month on month in six out of the last seven months. The slowdown in freight demand does not bode well for railroad operators.
Zacks Industry Rank Signals Glum Prospects
The Zacks Rail industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #173. This rank places it in the bottom 31% of more than 250 Zacks industries.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2023 have moved down 7.6% since May 2022.
Despite the gloomy outlook, there are a couple of stocks worth watching in the industry. But before we present them, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has declined 2.4% against the S&P 500 composite’s gain of 3%. The broader sector has declined 3.4% 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 6.97X compared with the S&P 500’s 5.51X. It is also above the sector’s P/B ratio of 4.14X.
Over the past five years, the industry has traded as high as 10.86X, as low as 5.69X and at the median of 8.08X.
Price-to-Book Ratio
3 Stocks to Keep a Tab on
All three stocks mentioned below carry a Zacks Rank #3 (Hold).
Union Pacific: Based in Omaha, NE, Union Pacific provides rail transportation services across the United States. Union Pacific's efforts to reward its shareholders, even in the current uncertain scenario, are impressive. In 2022, UNP bought back shares worth $6,282 million. The railroad operator paid dividends worth $3,159 million in 2022.
UNP's strong free cash flow generating ability supports its shareholder-friendly activities. The uptick in overall volumes (up 2% year over year in 2002) is an added positive. Union Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the past four quarters (missing the mark in the other one). The average beat is 2.28%.
Price and Consensus: UNP
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 is trying to drive growth in this challenging environment by reducing operating expenses. Efforts to reward its shareholders also bode well. CSX has a stellar track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in each of the past four quarters, by an average of 7.76%.
Price and Consensus: CSX
Norfolk Southern: We are impressed with Norfolk Southern's efforts to reward its shareholders through dividends and buybacks. In January 2023, the company's board announced a 9% uptick in its quarterly dividend payout to $1.35 per share. NSC's strong free cash flow generating ability supports NSC's shareholder-friendly activities.
Norfolk Southern has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 4.66%.
Price and Consensus: NSC
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3 Railroad Stocks to Watch Amid the Industry Weakness
Prospects of Zacks Transportation - Rail industry’s participants are being dented due to challenges like inflation-induced high interest rates, elevated fuel price and supply-chain woes. Most industry players are looking to drive their bottom line amid the headwinds through cost reduction.
Despite the challenges surrounding the industry, Union Pacific Corporation (UNP - Free Report) , CSX Corporation (CSX - Free Report) and Norfolk Southern Corporation (NSC - Free Report) appear better-placed to tide over the challenges.
About the Industry
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.
Factors Relevant to the Industry's Fortunes
Focus on Cost Cuts to Drive the Bottom Line: The industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The industry players are focusing on cost-cutting measures and making efforts to improve productivity and efficiency to mitigate high expenses and the effects of a weaker-than-expected demand scenario.
Economic Uncertainty: Despite a strong performance by major indices lately, the fact remains that we are by no means out of the woods, especially with respect to inflation-related woes. The recent production cut by the OPEC+ oil cartel, which includes OPEC members plus Russia, has led to a surge in oil prices. This may aggravate inflationary pressure and result in heightened economic uncertainty and market volatility. The turmoil in the banking sector — popularly known as the engine of economic growth — also does not bode well.
Weak Freight Demand: Risks associated with an economic slowdown, geopolitical tensions and supply-chain woes dampen the prospects of stocks belonging to this industrial cohort. Due to the uncertainty, the Cass Freight Index declined 1% on a month-on-month basis in March. In fact, the index has declined month on month in six out of the last seven months. The slowdown in freight demand does not bode well for railroad operators.
Zacks Industry Rank Signals Glum Prospects
The Zacks Rail industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #173. This rank places it in the bottom 31% of more than 250 Zacks industries.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2023 have moved down 7.6% since May 2022.
Despite the gloomy outlook, there are a couple of stocks worth watching in the industry. But before we present them, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has declined 2.4% against the S&P 500 composite’s gain of 3%. The broader sector has declined 3.4% 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 6.97X compared with the S&P 500’s 5.51X. It is also above the sector’s P/B ratio of 4.14X.
Over the past five years, the industry has traded as high as 10.86X, as low as 5.69X and at the median of 8.08X.
Price-to-Book Ratio
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
Union Pacific: Based in Omaha, NE, Union Pacific provides rail transportation services across the United States. Union Pacific's efforts to reward its shareholders, even in the current uncertain scenario, are impressive. In 2022, UNP bought back shares worth $6,282 million. The railroad operator paid dividends worth $3,159 million in 2022.
UNP's strong free cash flow generating ability supports its shareholder-friendly activities. The uptick in overall volumes (up 2% year over year in 2002) is an added positive. Union Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the past four quarters (missing the mark in the other one). The average beat is 2.28%.
Price and Consensus: UNP
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 is trying to drive growth in this challenging environment by reducing operating expenses. Efforts to reward its shareholders also bode well. CSX has a stellar track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in each of the past four quarters, by an average of 7.76%.
Price and Consensus: CSX
Norfolk Southern: We are impressed with Norfolk Southern's efforts to reward its shareholders through dividends and buybacks. In January 2023, the company's board announced a 9% uptick in its quarterly dividend payout to $1.35 per share. NSC's strong free cash flow generating ability supports NSC's shareholder-friendly activities.
Norfolk Southern has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 4.66%.
Price and Consensus: NSC