Back to top

Image: Bigstock

These 4 Railroad Stocks Are on Track to Rebound in 2021

Read MoreHide Full Article

As the health of the railroad industry is closely tied to the global economy, the coronavirus pandemic weighed heavily on railroad operations. A major economic downturn hurt volumes, thus causing a decline in freight revenues, which contribute the majority of railroad players’ top lines.

Since the reopening of economies in May, railroad players have been gradually recovering from the coronavirus-induced slump as freight market conditions improve. While volumes for most railroads remain below year-ago levels, it indicates a substantial increase from the pandemic-driven lows in April and early May.

AAR Data Shows Continued Improvement in Rail Traffic

Weekly rail traffic data released by the Association of American Railroads (“AAR”) shows consistent improvement in railroad volumes (carloads) over the past few months. After dipping 2.1% year over year for the week ending Sep 26, 2020, U.S. rail traffic (including intermodal) hit the positive territory in October with volumes (rail carloads and intermodal units) inching up 0.8% year over year for the week ending Oct 3, 2020. The uptrend has continued so far with carloads and intermodal units up 2.5% per AAR’s latest rail traffic release for the week ending Dec 19, 2020. However, when intermodal volumes are excluded, rail traffic remained below year-ago levels. For the week ending Dec 19, rail carloads were down 5.8% year over year.

Clearly, intermodal volumes are making up for the lost ground. Another key contributor to this upward trend in rail traffic has been grain volumes. While import volumes and Internet purchasing by consumers are causing an increase in intermodal volumes, rising soybean exports are boosting grain volumes.

Rail traffic should continue to increase in 2021 as economic recovery picks up pace on vaccine hopes (currently coronavirus vaccines are being rolled out in the United States).

Other Tailwinds Likely to Benefit Railroads in 2021

Amid coronavirus-induced volume softness, the precision scheduled railroading (“PSR”) model,an operating structure that reduces costs, enhances services and leads to optimal asset utilization, is providing a cushion to railroads. Reduced costs and increased efficiency from the PSR model is supporting railroads’ bottom line. The benefits are likely to amplify in 2021 as volume woes ease.

Additionally, 2021 is expected to make evident the benefits of the United States–Mexico–Canada Agreement (“USMCA”) agreement. The trade deal, which came into effect in July 2020, replaces the 25-year old North American Free Trade Agreement (“NAFTA”). It streamlines North American trade and is expected to boost volumes for railroads. The coronavirus pandemic clouded the effects of the trade deal in 2020.

Moody’s Upgraded Outlook for Railroads Adds to the Positivity

Moody's Investors Service’s revised outlook for North American railroads further supports our upbeat take on railroads for 2021.With gradually recovering freight volumes, the credit rating agency has changed the outlook for railroads to stable from negative. Moody's anticipates growth in shipments of most types of freight to pick up over the next 12 to 18 months. The volume growth is anticipated to be led by intermodal. The stable outlook is reflective of revenue growth of 4.2-6% for railroads over the next year or so, stated Moody's vice president Rene Lipsch.

4 Railroad Stocks Poised for a Recovery in 2021

Against the buoyant backdrop, the below-mentioned railroad stocks look poised for a rebound in 2021. Each of the 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.

CSX Corporation (CSX - Free Report) : This is a leading transportation company offering rail-based freight transportation services like traditional rail service, transport of intermodal containers and trailers. Reduced costs (down 12% year over year in the first nine months of 2020) primarily due to low fuel prices and increased efficiency are aiding the company.

With the economy recovering, intermodal volumes rebounded for CSX in the third quarter of 2020. After an 11% year-over-year decline in the second quarter, volumes increased 7% in the third quarter with both domestic and international shipments increasing as a result of tightening truck capacity among other factors. Intermodal volumes should continue to increase as market conditions improve further. With the freight scene picking up, the company is expected to see improvement in its merchandise volumes in 2021 as well.

The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 4.1% in the past 90 days.

Kansas City Southern (KSU - Free Report) :  Based in Kansas City, MO, this is a transportation holding company that has railroad investments in the United States, Mexico and Panama. With ramp up in economic activities, the company is seeing a gradual recovery in volumes. On the third-quarter conference call, it stated that at the end of the third quarter of 2020, volumes were approximately 60% higher than the lows in early May. Kansas City Southern expects volumes to keep improving in the fourth quarter and in 2021.

Moreover, increased efficiency and reduced costs, courtesy of the PSR model, is supporting the company’s bottom line. Kansas City Southern’s earnings (on a reported basis) increased 15.6% year over year in the first nine months of 2020, despite substantial decline in revenues.

The Zacks Consensus Estimate for the company’s 2021 earnings has been revised northward by 2.7% in the past 90 days.

Canadian Pacific Railway Limited (CP - Free Report) : Headquartered in Calgary, Canada, this company operates a transcontinental railway network in Canada and the United States. It focuses on providing logistics and supply chain expertise services.The company is benefiting from strong performance with respect to grain movement. In November, Canadian Pacific moved 2.96 million metric tonnes (MMT) of Canadian grain and grain products, breaking its November 2019 record by 8%. This follows another record-setting month in October, when it transported 3.04 MMT of Canadian grain and grain products, the first time ever that Canadian Pacific exceeded 3MMT in a month.

Additionally, with gradual recovery in freight-market conditions, Canadian Pacific’s automotive business rebounded significantly in the third quarter. After a massive 67.3% year-over-year decline in the second quarter, automotive revenues rose 8% in the third quarter with volumes rising 11%. Heading into 2021, this recovery process should gain momentum.

The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 5% in the past 90 days.

Canadian National Railway Company (CNI - Free Report) : Based in Montreal, Canada, the company is engaged in the rail and related transportation business. The company's rail network serves major Canadian ports and includes connections to the United States. Despite freight softness, Canadian National’s Grain and Fertilizers segment has continued to perform impressively. With the company having moved record volumes of Canadian grain, revenues from Grain and Fertilizers segment increased 5% in the first nine months of 2020.

In November, the company moved more than 3MMT of Canadian grain, marking its ninth straight month of record grain movement. As the economy continues to recover in 2021, other segments within freight should see an improvement.

The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 2.1% in the past 90 days.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks>>