For Immediate Release
Chicago, IL – April 9, 2018 – Today, Zacks Equity Research discusses the Industrial Metals, including Norfolk Southern Corp. (NSC - Free Report) , CSX Corp. (CSX - Free Report) , Kansas City Southern (KSU - Free Report) , Genesee & Wyoming, Inc. (GWR - Free Report) and Union Pacific Corp. (UNP - Free Report) .
Industry: Railroads, Part 1
Link: Link: https://www.zacks.com/commentary/156734/railroad-industry-outlook---april-2018
Stocks in the railroad space are being aided by momentum in the U.S. economy, with more goods being transported across the country.
The market is expected to continue its winning streak, banking on a rise in wages and more confident consumers. Moreover, the new tax law (Tax Cuts and Jobs Act) should boost profits further and drive stock prices of the participants of this key sector higher.
The robust financial health of railroads is reflective of the improved scenario for its players. The rebound has been aided by the much-improved scenario pertaining to the intermodal unit, a key revenue generating sector for railroads.
The sector has bounced back after a disappointing 2016. Intermodal revenues are likely to grow this year as well. In fact, intermodal shipments are expected to expand 4.2% in 2018, strengthening the top line for railroads in turn. Improvement pertaining to another key metric — operating ratio (operating expenses as a percentage of revenues) — is another positive for railroads.
In view of the above tailwinds, the fourth-quarter earnings season had been a good one for railroad stocks. Notwithstanding a few headwinds including some lingering impacts of devastating hurricanes, railroad companies continued the earnings momentum in the December quarter. We note that a number of companies in the space — including prominent names such as Norfolk Southern Corp., CSX Corp., Kansas City Southern and Genesee & Wyoming, Inc. — delivered an earnings beat in the quarter.
Volume Growth Likely to Drive Railroads in Q1
The stocks are likely to perform impressively in the first quarter of 2018 driven by volume growth. For example, the Zacks Rank #3 (Hold) railroad — Union Pacific Corp. — expects volume growth in the soon-to-be-reported quarter to increase in the low single-digit range. Strong performance at the intermodal unit is expected to aid results. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Efforts of railroads to check costs should boost their bottom lines further. For example, at the 2018 Investor Conference held in March, CSX stated that its transition to precision scheduled railroading is progressing well. The new model will lead to top-line growth on the back of volume and pricing gains from the merchandise and intermodal segments. Moreover, scheduled railroading is anticipated to provide greater agility to the coal markets. This, in turn, will drive growth.
Railroads should continue to see operating ratio-related improvements in the first quarter of 2018. The lesser the value of operating ratio the better, as it implies that more cash is available to the company to reward shareholders through dividends/buybacks.
In fact, the transportation sector, which includes railroads, is expected to see double-digit year-over-year earnings growth in the first quarter. For more details about the earnings of this sector and others, please read our Earnings Trends report.
Zacks Industry Rank Highlights Headwinds
Despite the above-mentioned tailwinds, the Zacks Industry Rank # 247 (of 250 plus groups) carried by the Zacks Rail Industry highlights that the industry is not bereft of headwinds. This unfavorable rank places the companies within the bottom 4% slot of the Zacks industries.
We classify our entire 250-plus industries into two groups: the top half (i.e. industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank).
Using a week’s rebalance, the top half beat the bottom half by a factor of more than 2 to 1 over the last decade.
Click here to know more: About Zacks Industry Rank
Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
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.
Zacks Investment Research
800-767-3771 ext. 9339
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/performancefor information about the performance numbers displayed in this press release.