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Zacks Industry Outlook Highlights: CSX, Norfolk Southern, Union Pacific and Canadian Pacific Railway

For Immediate Release

Chicago, IL – April 26, 2016 – Today, Zacks Equity Research discusses the Railroads, (part 1), including CSX Corp. (CSX), Norfolk Southern Corp. (NSC), Union Pacific Corp. (UNP) and Canadian Pacific Railway Limited (CP).

Industry: Railroads, part 1

Link: http://www.zacks.com/commentary/79144/railroad-stock-outlook...

Coal Still a Drag, Auto Recovery Raises Hope

The railroad industry has been weighed down for a while, on weak demand resulting from downturns in the manufacturing and broader mining sectors. But the outlook has started improving lately as reflected in the 6.07% rally in the Dow Jones U.S. Railroads Index over the last three months. Stabilization in the factory sector, strength in the auto sector and the industry’s continued operational efficiencies are driving these improvements.

The auto industry’s record sales are particular bright spot for railroad operators. At the end of the first quarter of 2016, total carloads for motor vehicles and parts improved 9.1%, a strong gain from last year. The hope is that the auto sector’s momentum will continue the rest of this year. Recent signs of improvement in the factory sector, as reflected in the last ISM survey, should also have a beneficial effect on demand.

On the flip side, the weak outlook for coal and continued international trade woes remain problematic.

Nearly 50% of the U.S. rail intermodal volumes involve imports and exports. According to the Association of American Railroads (AAR), in the first 12 weeks of 2016, U.S. railroads reported cumulative volume of 2,905,113 carloads, down 13.7% from the same period last year. Railroad operators are also concerned about the projection of a $14.7 billion to $125 billion annual decline in exports in 2016 by the United States Department of Agriculture (USDA).

Coal, which has historically been a major revenue source for the railroad industry, continues to generate big headwinds. As per the U.S. Energy Information Administration's (EIA), coal consumption dropped 13% in 2015, mainly triggered by a 13% decline in electric power sector consumption. The body also expects a 12.4% year-over-year drop in production to around 784.1 MMst in 2016, one of the lowest since 1958. In the fourth quarter of 2015, major railroad operators like CSX Corp. (CSX), Norfolk Southern Corp. (NSC) and Union Pacific Corp. ( UNP) witnessed annual declines in coal volumes of 32%, 18% and 22%, respectively.

Meanwhile, the proposed merger between Canadian Pacific Railway Limited ( CP) and Norfolk Southern failed to materialize owing to regulatory obstacles. The failed transaction seems to have dealt a major blow to the overall U.S. railroad industry as it has extinguished hopes of the construction of an extensive transcontinental network.

Zacks Industry Rank

Within the Zacks Industry classification, railroads are broadly grouped within Transportation (one of the 16 Zacks sectors).

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more, visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is ‘Positive,’ between #89 and #176 is ‘Neutral’ and #177 and higher is ‘Negative.’

The Zacks Industry Rank for the railroad industry is currently #44, implying a positive outlook.

Earnings Trend

Railroads belong to the broader Transportation sector. Average earnings growth was 14.5% for fourth quarter of 2015, but the sector’s earnings and revenues are expected to be flat in the first quarter, with strong gains among the air carriers offset by earnings declines at the railroad operators.

In the Q1 earnings cycle, we currently have reports from 59.8% of the sector’s total market cap in the S&P 500 index. Total earnings for these Transportation sector companies are up +12.7% from the same period last year on -0.7% lower revenues, with 87.5% beating EPS estimates and only 25% coming ahead of revenue expectations.

(For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

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CSX CORP (CSX): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
CDN PAC RLWY (CP): Free Stock Analysis Report
 
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