For Immediate Release

Chicago, IL – December 28, 2021 – Today, Zacks Equity Research discusses Railroad, including Union Pacific Corporation UNP, Canadian National Railway Company CNI, CSX Corporation CSX and Norfolk Southern Corporation NSC.

Link: https://www.zacks.com/commentary/1843687/4-railroad-stocks-to-watch-out-for-despite-industrys-near-term-woes

The Zacks Transportation - Rail industry is grappling with supply chain disruptions amid the prevalent coronavirus pandemic. This in turn is hurting railroad volumes in some segments. Rising fuel prices further add to the railroad companies’ woes as high fuel expenses have the potential to dent the bottom line. These factors point to a bleak near-term outlook for the railroad industry.

However, with strong freight market conditions being a key growth driver, companies like Union Pacific Corp., Canadian National Railway, CSX Corp. and Norfolk Southern Corp. are poised to gain.

About the Industry

The Zacks Transportation - Rail industry consists of railroad operators that transport 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 the major 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 services to multiple production and distribution facilities.

Besides owning locomotives, some of these companies have equipment of leased locomotives, railcars etc. These companies have an extended network, spanning approximately 20,000 route miles on average.

3 Trends Shaping the Future of the Railroad Industry

Strong Coal Volumes: U.S. railroad volumes have been steadily improving across some segments. At the forefront of this volume growth is the coal unit. In the first 11 months of 2021, coal volumes increased more than 11% year over year, per the Association of American Railroads (AAR). This is because surging natural gas prices are leading to the increased usage of coal.

Per AAR’s latest rail traffic report, total U.S. rail traffic has increased 5.9% year over year in the first 50 weeks of 2021. U.S. railroad volumes are expected to continue their uptrend in 2022 as freight market conditions remain strong owing to healthy consumer spending.

Supply Chain Disruptions Hurt Operations: Persistent supply chain disruptions, including labor and equipment shortage, are hurting railroad volumes in some segments, especially the intermodal unit. The AAR’s rail traffic data shows that U.S. intermodal volumes have declined from the year-ago period over the past several weeks.

Shortage of trucks, drivers and warehouse capacity is hurting intermodal volumes. Supply chain disruptions are likely to persist over the near term as newer COVID-19 variants emerge. This might continue to dent intermodal volumes.

Rising Fuel Prices Pose a Threat: With fuel expenses being a major input cost for transportation companies, escalating fuel prices pose a threat to railroad companies’ bottom line. Amid coronavirus-related uncertainty, rising fuel prices might further impede the growth of railroad companies.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #200. This rank places it in the bottom 21% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry is positioned in the bottom 50% of the Zacks-ranked industries.

Nevertheless, we will present a few noteworthy stocks. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.

Industry Outperforms Sector But Lags S&P 500

While the Zacks Railroad industry has outperformed the broader Transportation sector over the past year, it has underperformed the Zacks S&P 500 composite index.

Over this period, the industry has risen 17.8% compared with the broader sector and the S&P 500 Index’s 9.2% and 28.8% increase, respectively.

Industry's Current Valuation

On the basis of trailing 12-month price-to-book (P/B), which is a commonly used multiple for valuing railroad stocks, the industry is currently trading at 10.64X compared with the S&P 500’s 7.24X. It is also above the sector’s P/B ratio of 6.24X.

Over the past five years, the industry has traded as high as 10.89X, as low as 5.69X and at the median of 7.96X.

4 Railroad Stocks to Keep a Tab On

Norfolk Southern: Headquartered in Atlanta, GA, Norfolk Southern is a major freight railroad company, primarily engaged in the transportation of raw material, intermediate products and finished goods.

Volume growth across all its segments is driving Norfolk Southern’s top line. The company anticipates total revenues to increase at least 12% in 2021 from 2020 levels on the back of strong growth in the intermodal and merchandise segments. Given strong freight market conditions, NSC is expected to continue to thrive in 2022.

The Zacks Consensus Estimate for Norfolk Southern’s 2022 earnings has been revised upward by 2.8% in the past 90 days. Shares of the company, carrying a Zacks Rank #2 (Buy), have gained 23.4% in a year’s time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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, carrying a Zacks Rank #3 (Hold), is seeing growth across all its businesses, owing to a healthy freight environment. The company hopes to achieve double-digit revenue growth in 2021. The acquisition of Quality Carriers in July is aiding its top line.

The Zacks Consensus Estimate for CSX’s 2022 earnings has been revised upward by 4.7% in the past 90 days. Shares of the company have rallied 23.1% in a year’s time.

Union Pacific: Based in Omaha, NE, Union Pacific provides rail transportation services across the United States.

Productivity savings from the implementation of the precision scheduled railroading model is aiding Union Pacific’s bottom line. The company expects to generate productivity savings of $350 million in 2021. UNP’s strong free cash flow generation capacity supports its shareholder-friendly activities.  In December, the company hiked its quarterly dividend by 10%. This was the second dividend hike announced by the company this year.

The Zacks Consensus Estimate for Union Pacific’s 2022 earnings has been revised upward by 6 cents in the past 90 days. Shares of this Zacks Rank #3 company have jumped more than 21% over the past year.

Canadian National: Based in Montreal, Canada, Canadian National 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.

Higher freight rates are driving Canadian National’s bottom line. The company anticipates 2021 earnings per share to increase 10% from adjusted earnings reported in 2020. CNI’s commitment to reward its shareholders is noteworthy. The company has raised dividends for 25 consecutive years.

The Zacks Consensus Estimate for Canadian National’s 2022 earnings has been revised upward by 2.1% in the past 90 days. Shares of this Zacks Rank #3 company have gained 10.8% in a year’s time.

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