The Zacks Transportation - Railindustry faces challenges, ranging from inflationary pressures and resultant high interest rates to concerns pertaining to supply-chain disruptions.
Despite the challenges surrounding the industry,Canadian Pacific Kansas City Limited CP, Canadian National Railway Company (CNI) and Norfolk Southern Corporation NSC appear better placed to tide over the challenges. Declining fuel costs represent a tailwind as far as bottom-line growth is concerned.
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.
Factors Deciding the Industry's Outlook
Strong Financial Returns for Shareholders:With economic activities gaining pace from the pandemic lows, more and more companies are allocating their increasing cash pile through dividends and buybacks to pacify long-suffering shareholders. This underlines their financial strength and confidence in the business. Among the Transportation – Railroad industry players, CNI and CSX announced an increase in the quarterly dividend this year.
Uptick in Oil Price is a Headwind: The increase in expenses on fuel represents a concern for the industry. Notably, oil prices increased almost 1.1% from the beginning of October 2024 to date. As fuel expenses represent a key input cost for any transportation player, a rise in oil prices does not bode well for the bottom-line growth of railroad stocks.
Focus on Cost Cuts to Drive Bottom Line: Despite cooling inflation, we are by no means out of the woods. The hotter-than-expected inflation reading for September substantiates our view. We note that the industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The industry players are focusing on cost-cutting measures, and improving productivity and efficiency to mitigate high expenses and a weaker-than-expected demand scenario.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #145. This rank places it in the bottom 42% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, 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 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 6.2%.
Before we present a few stocks that investors can retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Underperforms S&P 500 and Sector
The Zacks Transportation - Rail industry has underperformed the Zacks S&P 500 Composite index as well as the broader sector over the past year.
Over this period, the industry has declined 3.6% compared with the S&P 500 Index’s northward movement of 28.6% and the broader sector’s growth of 0.9%.
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 6.31X compared with the S&P 500’s 8.86X. It is above the sector’s P/B ratio of 4.58X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 7.58X.
3 Stocks to Keep an Eye On
We are presenting three Zacks Rank #3 (Hold) stocks that are well-positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Canadian Pacific: Headquartered in Calgary, Canada, Canadian Pacific manages a transcontinental freight railway in Canada, the United States and Mexico.
Improvement in freight revenues bode well for Canadian Pacific Kansas City. Efforts to reward shareholders through dividends are commendable. Canadian Pacific's earnings surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the remaining two quarters), delivering an average surprise of 1.52%.
Price and Consensus: CP
CNI: Based in Montreal, Canada, Canadian National is involved in the rail, intermodal, trucking, and marine transportation and logistics business in Canada and the United States.
Canadian National's consistent efforts to reward its shareholders via dividends and buybacks are encouraging and highlight its financial strength. Strong cash flow generating ability supports its shareholder-friendly activities. For 2024, CNI now expects to deliver adjusted diluted EPS growth in the low-single-digit range. CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in three of the past four quarters (in line with the mark in the remaining quarter), with an average beat of 1.64%.
Price and Consensus: CNI
Norfolk Southern: Headquartered in Atlanta, GA, Norfolk Southern engages in the rail transportation of raw materials, intermediate products and finished goods in the United States.
Ecommerce demand is supporting Norfolk Southern’s shipment volumes, its PSR and other cost reduction initiatives are increasing its operating efficiency, while steady shareholder returns supports prices. The company's earnings surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the remaining two quarters), delivering an average surprise of 1.58%.
Price and Consensus: NSC
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