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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 Pacific Kansas City Ltd., CSX Corp. and Norfolk Southern Corp. 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
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.
Decline in Oil Price is a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 14% from the beginning of July 2024 to date. As fuel expenses represent a key input cost for any transportation player, a 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.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #93. This rank places it in the top 37% 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 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 14.8% compared with the S&P 500 Composite's growth of 29.4%. The broader sector has increased 9.4% in the said time frame.
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 7.03X compared with the S&P 500's 8.55X. It is 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 7.76X.
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 consistently. Such a move instills investors' confidence and positively impacts the company's bottom line. Canadian Pacific has an encouraging track record with respect to earnings surprises. The company's earnings surpassed the Zacks Consensus Estimate in three of the past four quarters (missing the mark in the remaining quarter), delivering an average surprise of 2.23%.
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 three of the past four quarters (in line with the mark in the remaining quarter), with an average beat of 1.64%.
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.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Canadian Pacific Kansas City, CSX and Norfolk Southern
For Immediate Release
Chicago, IL – September 23, 2024 – Today, Zacks Equity Research discusses Canadian Pacific Kansas City Ltd. (CP - Free Report) , CSX Corp. (CSX - Free Report) and Norfolk Southern Corp. (NSC - Free Report) .
Industry: Railroads
Link: https://www.zacks.com/commentary/2339070/3-railroad-stocks-to-watch-from-the-prospering-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 Pacific Kansas City Ltd., CSX Corp. and Norfolk Southern Corp. 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
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.
Decline in Oil Price is a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 14% from the beginning of July 2024 to date. As fuel expenses represent a key input cost for any transportation player, a 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.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Railroad industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #93. This rank places it in the top 37% 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 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 14.8% compared with the S&P 500 Composite's growth of 29.4%. The broader sector has increased 9.4% in the said time frame.
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 7.03X compared with the S&P 500's 8.55X. It is 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 7.76X.
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.
We are encouraged by the Canadian Pacific's decision to pay dividends consistently. Such a move instills investors' confidence and positively impacts the company's bottom line. Canadian Pacific has an encouraging track record with respect to earnings surprises. The company's earnings surpassed the Zacks Consensus Estimate in three of the past four quarters (missing the mark in the remaining quarter), delivering an average surprise of 2.23%.
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 three of the past four quarters (in line with the mark in the remaining quarter), with an average beat of 1.64%.
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.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.