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4 Stocks to Watch From the Prospering Railroad Industry
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The Zacks Transportation - Rail industry 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 National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) , CSX Corporation (CSX - Free Report) and Norfolk Southern Corporation (NSC - Free Report) 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
Decline in Oil Price is a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 1.9% in the April-June 2024 period. As fuel expenses represent a key input cost for any transportation player, the fall in oil prices bodes well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Although signs of easing inflation imply some sort of relief to the U.S. stock market, the fact remains that we are far from being out of the woods. Inflation is still above the Federal Reserve’s 2% target. We note that the industry has been experiencing significant levels of inflation, including higher prices for labor and freight. Rising inflation can make markets more volatile in the coming days. Rising economic uncertainty does not bode well for railroad stocks.
Dividend Hikes Signal Financial Bliss: 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, in January 2024, approved a 7% dividend increase to C$0.845 on the company's common shares outstanding. In February 2024, CSX's board of directors declared a 9% hike in its quarterly dividend to 12 cents per share.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #44. This rank places it in the top 18% 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.
Before we present a few stocks that investors can buy or retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has gained 3.4% compared with the S&P 500 Composite’s gain of 27.7% and the broader sector’s decline of 2.4%.
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 6.58X compared with the S&P 500’s 8.94X. It is also above the sector’s P/B ratio of 4.00X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 7.95X.
Canadian National: 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 is benefiting from solid pricing, low costs and strong liquidity. For 2024, CNI anticipates to deliver adjusted earnings per share growth of approximately 10%. Efforts to reward its shareholders via dividends and buybacks are encouraging and highlight its financial strength. In January 2024, the company announced a 7% dividend hike. This marks the company’s 28th annual dividend increase. The firm is also active on the share buyback front. Strong cash flow generating ability supports its shareholder-friendly activities.
CNI has surpassed the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the other two).
Price and Consensus: CNI
Canadian Pacific: Headquartered in Calgary, Canada, Canadian Pacific manages a transcontinental freight railway in Canada, the United States, and Mexico. We are encouraged by the Canadian Pacific’s decision to pay dividends.
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 expects volumes in 2024 to grow in the low to mid-single digits, driven by strong anticipated performances in the merchandise, intermodal and coal units. To counter inflationary pressure, the railroad operator aims to improve efficiencies. The company's focus on improving workplace safety for employees is commendable. We are also impressed by CSX's efforts to reward its shareholders through dividends and buybacks. In February 2024, CSX raised its dividend by 9.1% to 12 cents per share.
CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in two of the past four quarters (in line with the mark in the remaining two quarters), with an average beat of 1.12%.
Price and Consensus: CSX
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.
We are impressed by Norfolk Southern’s efforts to reward its shareholders through dividends and buybacks. Its strong free cash flow generating ability supports its shareholder-friendly activities. NSC’s focus on improving service, safety, and productivity despite the challenges is commendable. As a reflection of its focus on safety, NSC has been witnessing a reduction in the mainline accident rate.
Price and Consensus: NSC
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4 Stocks to Watch From the Prospering Railroad Industry
The Zacks Transportation - Rail industry 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 National Railway Company (CNI - Free Report) , Canadian Pacific Kansas City Limited (CP - Free Report) , CSX Corporation (CSX - Free Report) and Norfolk Southern Corporation (NSC - Free Report) 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
Decline in Oil Price is a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 1.9% in the April-June 2024 period. As fuel expenses represent a key input cost for any transportation player, the fall in oil prices bodes well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: Although signs of easing inflation imply some sort of relief to the U.S. stock market, the fact remains that we are far from being out of the woods. Inflation is still above the Federal Reserve’s 2% target. We note that the industry has been experiencing significant levels of inflation, including higher prices for labor and freight. Rising inflation can make markets more volatile in the coming days. Rising economic uncertainty does not bode well for railroad stocks.
Dividend Hikes Signal Financial Bliss: 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, in January 2024, approved a 7% dividend increase to C$0.845 on the company's common shares outstanding. In February 2024, CSX's board of directors declared a 9% hike in its quarterly dividend to 12 cents per share.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #44. This rank places it in the top 18% 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.
Before we present a few stocks that investors can buy or retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500 But Outperforms Sector
Over the past year, the Zacks Transportation - Rail industry has gained 3.4% compared with the S&P 500 Composite’s gain of 27.7% and the broader sector’s decline of 2.4%.
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 6.58X compared with the S&P 500’s 8.94X. It is also above the sector’s P/B ratio of 4.00X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 7.95X.
4 Stocks to Keep an Eye On
We are presenting four 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 National: 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 is benefiting from solid pricing, low costs and strong liquidity. For 2024, CNI anticipates to deliver adjusted earnings per share growth of approximately 10%. Efforts to reward its shareholders via dividends and buybacks are encouraging and highlight its financial strength. In January 2024, the company announced a 7% dividend hike. This marks the company’s 28th annual dividend increase. The firm is also active on the share buyback front. Strong cash flow generating ability supports its shareholder-friendly activities.
CNI has surpassed the Zacks Consensus Estimate in two of the last four quarters (missing the mark in the other two).
Price and Consensus: CNI
Canadian Pacific: Headquartered in Calgary, Canada, Canadian Pacific manages a transcontinental freight railway in Canada, the United States, and Mexico. We are encouraged by the Canadian Pacific’s decision to pay dividends.
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 expects volumes in 2024 to grow in the low to mid-single digits, driven by strong anticipated performances in the merchandise, intermodal and coal units. To counter inflationary pressure, the railroad operator aims to improve efficiencies. The company's focus on improving workplace safety for employees is commendable. We are also impressed by CSX's efforts to reward its shareholders through dividends and buybacks. In February 2024, CSX raised its dividend by 9.1% to 12 cents per share.
CSX has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in two of the past four quarters (in line with the mark in the remaining two quarters), with an average beat of 1.12%.
Price and Consensus: CSX
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.
We are impressed by Norfolk Southern’s efforts to reward its shareholders through dividends and buybacks. Its strong free cash flow generating ability supports its shareholder-friendly activities. NSC’s focus on improving service, safety, and productivity despite the challenges is commendable. As a reflection of its focus on safety, NSC has been witnessing a reduction in the mainline accident rate.
Price and Consensus: NSC