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
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.
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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