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3 Railroad Stocks to Watch From the Challenging 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.
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
High Oil Price Hurts Bottom Line: The uptick in expenses on fuel represents another headwind for the industry. Notably, oil prices rose 16% in the first three months of 2024 period. As fuel expenses represent a key input cost for any transportation player, the rise in oil prices does not bode well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Although symptoms of easing inflation imply 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 in January, February and March have dampened hopes of a rate cut any time soon. Rising inflation can make markets more volatile in the coming days. Rising economic uncertainty does not bode well for railroad 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 January 2024, CNI approved a 7% dividend increase to C$0.845 on the company's common shares outstanding. In February 2024, CSX's board of directors declared a 9.1% hike in its quarterly dividend to 12 cents per share.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #192. This rank places it in the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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.
The sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 12.1%.
Despite the cloudy prospects, we present a few stocks that investors can retain, given their sturdy potential. But before that, let’s take a look at the industry’s recent stock market performance and its current valuation.
Industry Lags S&P 500 & Sector
Over the past year, the Zacks Transportation - Rail industry has gained 16.5% compared with the S&P 500 composite’s gain of 26.1% and the broader sector’s surge of 18.4%.
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 7.40X compared with the S&P 500’s 6.45X. It is also above the sector’s P/B ratio of 4.87X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 8.10X.
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 2024, the company’s board approved a dividend hike of 7% in January. This marks the company’s 28th annual dividend increase. The company also announced a normal course issuer bid over a 12-month period up to 32 million common shares. The bid has taken effect from Feb 1, 2024, and runs through Jan 31, 2025. 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 two of the last four quarters (missing the mark in the other two).
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. In February 2024, the company announced a 9.1% hike in its quarterly dividend to 12 cents per share.
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 4.14%.
Price and Consensus: CSX
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3 Railroad Stocks to Watch From the Challenging 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.
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
High Oil Price Hurts Bottom Line: The uptick in expenses on fuel represents another headwind for the industry. Notably, oil prices rose 16% in the first three months of 2024 period. As fuel expenses represent a key input cost for any transportation player, the rise in oil prices does not bode well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Although symptoms of easing inflation imply 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 in January, February and March have dampened hopes of a rate cut any time soon. Rising inflation can make markets more volatile in the coming days. Rising economic uncertainty does not bode well for railroad 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 January 2024, CNI approved a 7% dividend increase to C$0.845 on the company's common shares outstanding. In February 2024, CSX's board of directors declared a 9.1% hike in its quarterly dividend to 12 cents per share.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #192. This rank places it in the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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.
The sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 12.1%.
Despite the cloudy prospects, we present a few stocks that investors can retain, given their sturdy potential. But before that, let’s take a look at the industry’s recent stock market performance and its current valuation.
Industry Lags S&P 500 & Sector
Over the past year, the Zacks Transportation - Rail industry has gained 16.5% compared with the S&P 500 composite’s gain of 26.1% and the broader sector’s surge of 18.4%.
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 7.40X compared with the S&P 500’s 6.45X. It is also above the sector’s P/B ratio of 4.87X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 8.10X.
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 2024, the company’s board approved a dividend hike of 7% in January. This marks the company’s 28th annual dividend increase. The company also announced a normal course issuer bid over a 12-month period up to 32 million common shares. The bid has taken effect from Feb 1, 2024, and runs through Jan 31, 2025. 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 two of the last four quarters (missing the mark in the other two).
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. In February 2024, the company announced a 9.1% hike in its quarterly dividend to 12 cents per share.
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 4.14%.
Price and Consensus: CSX