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3 Railroad Stocks to Watch Amid the Industry Weakness
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The Zacks Transportation - Rail industry is suffering from headwinds like inflationary pressures, resultant high-interest rates, increased fuel prices and supply-chain disruptions.
Despite the challenges surrounding the industry, Canadian National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) and CSX Corporation (CSX - Free Report) appear better placed to tide over the challenges.
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.
3 Factors Deciding the Industry's Outlook
High Oil Price Hurts Bottom Line: Oil price surged 28.5% in the July-September period due to the extension of production cut by Saudi Arabia and Russia through the end of the current year. As fuel expenses represent a key input cost for any transportation player, the uptick in these costs is likely to have hurt the bottom line of the transportation companies in the third quarter.
Economic Uncertainty Remains: Though easing inflation has brought some relief to U.S. stock markets, the fact remains that we are far from being out of the woods. Though the Fed did not hike interest rates in September, Fed Chair Jerome Powell said that the fight against inflation is far from over and that at least another quarter percentage interest rate hike is required in the current year. Sluggish economic growth and inflationary woes are likely to hurt consumer spending for the remainder of 2023.
Dividend Hikes Signal Financial Bliss: With the resumption of economic activities, many players, including some railroad companies, are reactivating shareholder-friendly measures like paying out dividends, which underline their solid financial footing and confidence in the business. For example, in 2023, CSX raised its dividend by 10% to 11 cents per share.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #157. This rank places it in the bottom 37% 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 dull 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 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 12.1%.
Despite the cloudy prospects, we present a few stocks that investors can retain, given their sturdy potential. But before that, let’s take a look at the industry’s recent stock market performance and its current valuation.
Industry Lags S&P 500 & Sector
Over the past year, the Zacks Transportation - Rail industry has declined 4% compared with the S&P 500 composite’s gain of 7.8% and the broader sector’s decline of 1.6%.
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 6.27X compared with the S&P 500’s 5.46X. It is also above the sector’s P/B ratio of 3.90X.
Over the past five years, the industry has traded as high as 10.86X, as low as 5.69X and at the median of 8.08X.
Canadian National: Based in Montreal, Canada, Canadian National is involved in rail and related transportation business. CNI’s efforts to reward its shareholders via dividends and buybacks are encouraging and highlight the company's financial strength. In January, the company announced an 8% dividend hike. Strong cash flow generating-ability supports Canadian National's shareholder-friendly activities. The company is also benefiting from higher export volumes of Canadian grain.
CNI has an encouraging track record with respect to earnings surprise. The company surpassed the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the other two). The average beat is 2.52%.
Price and Consensus: CNI
Canadian Pacific: The company is being well-served by the uptick in revenues at key sub-groups like grain, potash, forest products, metals, minerals and consumer products, automotive and intermodal. We are encouraged by the Canadian Pacific’s decision to pay dividends even in the current uncertain scenario.
Canadian Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the other two).
Price and Consensus: CP
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 continues to expect capex for 2023 to be around $2.3 billion. To combat inflationary pressures, management aims to focus on increasing efficiencies. Volumes are expected to be aided by strength in the merchandise and coal units. CSX is trying to drive growth by reducing operating expenses. Efforts to reward its shareholders also bode well. CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in each of the past four quarters, with an average beat of 4.64%.
Price and Consensus: CSX
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3 Railroad Stocks to Watch Amid the Industry Weakness
The Zacks Transportation - Rail industry is suffering from headwinds like inflationary pressures, resultant high-interest rates, increased fuel prices and supply-chain disruptions.
Despite the challenges surrounding the industry, Canadian National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) and CSX Corporation (CSX - Free Report) appear better placed to tide over the challenges.
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.
3 Factors Deciding the Industry's Outlook
High Oil Price Hurts Bottom Line: Oil price surged 28.5% in the July-September period due to the extension of production cut by Saudi Arabia and Russia through the end of the current year. As fuel expenses represent a key input cost for any transportation player, the uptick in these costs is likely to have hurt the bottom line of the transportation companies in the third quarter.
Economic Uncertainty Remains: Though easing inflation has brought some relief to U.S. stock markets, the fact remains that we are far from being out of the woods. Though the Fed did not hike interest rates in September, Fed Chair Jerome Powell said that the fight against inflation is far from over and that at least another quarter percentage interest rate hike is required in the current year. Sluggish economic growth and inflationary woes are likely to hurt consumer spending for the remainder of 2023.
Dividend Hikes Signal Financial Bliss: With the resumption of economic activities, many players, including some railroad companies, are reactivating shareholder-friendly measures like paying out dividends, which underline their solid financial footing and confidence in the business. For example, in 2023, CSX raised its dividend by 10% to 11 cents per share.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #157. This rank places it in the bottom 37% 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 dull 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 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 12.1%.
Despite the cloudy prospects, we present a few stocks that investors can retain, given their sturdy potential. But before that, let’s take a look at the industry’s recent stock market performance and its current valuation.
Industry Lags S&P 500 & Sector
Over the past year, the Zacks Transportation - Rail industry has declined 4% compared with the S&P 500 composite’s gain of 7.8% and the broader sector’s decline of 1.6%.
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 6.27X compared with the S&P 500’s 5.46X. It is also above the sector’s P/B ratio of 3.90X.
Over the past five years, the industry has traded as high as 10.86X, as low as 5.69X and at the median of 8.08X.
3 Stocks to Keep a Tab on
Each stock mentioned below carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Canadian National: Based in Montreal, Canada, Canadian National is involved in rail and related transportation business. CNI’s efforts to reward its shareholders via dividends and buybacks are encouraging and highlight the company's financial strength. In January, the company announced an 8% dividend hike. Strong cash flow generating-ability supports Canadian National's shareholder-friendly activities. The company is also benefiting from higher export volumes of Canadian grain.
CNI has an encouraging track record with respect to earnings surprise. The company surpassed the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the other two). The average beat is 2.52%.
Price and Consensus: CNI
Canadian Pacific: The company is being well-served by the uptick in revenues at key sub-groups like grain, potash, forest products, metals, minerals and consumer products, automotive and intermodal. We are encouraged by the Canadian Pacific’s decision to pay dividends even in the current uncertain scenario.
Canadian Pacific has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the other two).
Price and Consensus: CP
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 continues to expect capex for 2023 to be around $2.3 billion. To combat inflationary pressures, management aims to focus on increasing efficiencies. Volumes are expected to be aided by strength in the merchandise and coal units. CSX is trying to drive growth by reducing operating expenses. Efforts to reward its shareholders also bode well. CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in each of the past four quarters, with an average beat of 4.64%.
Price and Consensus: CSX