Railroads Hope to Get Earnings Back on Track
Improving economy offers some first-quarter relief for battered sector, analysts say, but ‘our crystal ball is broken’
ENLARGE
An eastbound Norfolk Southern Corp. mixed freight train passes a westbound auto-rack train near Waddy, Ky., in October 2015. CSX this week will be the first big freight railroad to report first-quarter earnings. Photo: Bloomberg News
After months of sagging stock prices, some analysts are predicting a bit of relief for the group as certain cargo groups hit bottom and the economic outlook improves. CSX Corp. will offer a first glimpse as the first of the big freight railroads to report first-quarter earnings after the market closes on Tuesday.
Rail stocks have been battered for the past year by a combination of slowed global trade, a strong dollar, plunging commodity prices and reduced domestic oil shipments. The shares, which hit a low near the beginning of February, rebounded about 6% on average through most of March, compared with a 5% gain by the S&P 500, according to BB&T Capital Markets. Cargo volumes excluding coal and intermodal—the movement of containers or trailers also carried by truck—may have hit bottom, analysts say.
Still, “our crystal ball is broken,” says David Vernon, a transportation analyst at Sanford C. Bernstein & Co. The longer the industry is in decline, the bigger the element of surprise when it comes to earnings. “Be braced for some volatility,” he says.
The first quarter is generally expected to be the toughest for railroads this year, because of difficult comparisons to a better quarter a year ago and flooding in some southern states, primarily affecting Union Pacific Corp. and Kansas City Southern. In addition, macroeconomic signs such as improving industrial production and stock-market gains are more positive than at the start of the year, analysts say.
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Through March, total U.S. volumes for railroads fell about 6.5% to nearly 6.5 million carloads, trailers and containers, compared with the same period a year earlier. That compares with an increase of less than 1% in the same quarter a year ago.
Railroads have been hardest hit by a steep drop-off in coal shipments, down more than 30% in the quarter as power plants switch to cheap natural gas and exports fall. In addition, intermodal was up slightly for the year, but only because of a big drop early last year amid labor unrest at West Coast ports.
Excluding those two categories, there are signs cargo groups including industrial goods, metals and grain may bounce back, says Justin Long, a transportation analyst with Stephens Inc. That category comprises about 60% of revenue, depending on the railroad.
“Cautious optimism is how I would define it,” he adds.
Each railroad has outlined different measures to handle the steep drop-off in volumes. Union Pacific and CSX are cutting thousands of jobs, while Norfolk Southern Corp. has outlined a five-year profit-improvement plan to ward off merger advances from rival Canadian Pacific Railway Ltd.
Certain rail stocks are also continuing to suffer because of uncertainty around that potential merger, which, if successful, could trigger North American industry consolidation.
Norfolk Southern’s shareholders will be asked to vote at the May 12 annual meeting on whether to press the railroad’s board to negotiate with Canadian Pacific. A no vote will likely kill the roughly $30 billion deal.
Analysts generally agree that a merger faces mounting opposition from both U.S. government officials and rail shippers making regulatory approvals likely tougher to secure.
Write to Laura Stevens at laura.stevens@wsj.com
