It's Full Steam Ahead in 2021 for These 4 Railroad Stocks

The railroad industry is one of the major components of the U.S. transportation sector and is closely tied to the economy's growth. The COVID-19 pandemic has greatly affected the railroad industry, with a large decrease in traffic due to disruptions in supply and value chains. Freight transportation virtually came to a standstill during the initial days of the pandemic, affecting  companies operating in this sector. The global freight market declined at a CAGR of 2.5% last year.

However, as pandemic restrictions have been eased there has been a rebound and continued improvement in the freight market since the July-September quarter. A nationwide vaccination drive and the gradual resumption of industrial and economic activities should lead to a V-shaped economic recovery this year, leading to a quick rebound in freight transportation globally.

As witnessed in China, domestic tourism will be the first to benefit post-Covid-19. It is expected that regional travel might be the next beneficiary as travelers look to travel to neighboring destinations rather than further afield. A boom in rail travel may be even possible because this offers a middle ground between expensive airline travel and slow travel by sea.

The railroad sector has shown resilience during the pandemic by harmonizing operational requirements and integrating with other modes of transport to enhance its  competitiveness. Companies such as Union Pacific Corporation (UNP), Canadian National Railway Company (CNI), CSX Corporation (CSX) and Norfolk Southern Corporation (NSC) have experienced growth in merchandise volumes and  higher fuel surcharge revenue. These stocks should gain with the economic recovery and therefore  should be a wise bet now.

Union Pacific Corporation (UNP)

UNP is a railroad operating company in the U.S. . Its business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal. The company operates through its principal operating segment, Union Pacific Railroad Company (UPRR).

On November 20, UNP launched an intermodal terminal that will deliver its services between the Twin Cities and Los Angeles. This terminal service, with its strategic location, will help UNP expand its customers reach to key upper Midwest markets.

UNP’s operating revenues have increased 15.9% sequentially to $4.92 billion in the third quarter ended September 30, 2020. Income from operating activities has risen 22.8% sequentially to $2.03 billion over the same period, while its EPS has improved 21% sequentially to $2.02.

The consensus EPS estimate of $2.22 for the about-to-be-reported quarter (ended December 31,  2020) indicates a 9.9% improvement year-over-year. The stock has gained 20.4% over the past year.

How does UNP stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

B for Peer Grade

A for Industry Rank

A for Overall POWR Rating

The stock is also ranked #1 of 20 stocks in the Railroads Industry.

Canadian National Railway Company (CNI)

CNI is engaged in the rail and related transportation business. It serves exporters, importers, retailers, farmers, and manufacturers. The company also provides trucking services and supply chain services and operates logistics parks.

CNI secured a place on CDP’s prestigious ‘A List’ for tackling climate change in early December. This recognizes the company's sustainable business practices in advocating social responsibility and environmental stewardship.

On December 10, CNI launched its new inland distribution terminal in New Richmond, WI to deepen network reach in the Twin Cities and Midwest. This new multipurpose facility will provide customers with an alternative shipping option to the growing marketplace, along with  additional environmental and transportation cost reduction benefits.

In mid-December , CNI launched the first phase of an innovative, high-tech logistics park in Mobile, Alabama in partnership with Alabama Export Railroad and Ray-Mont Logistics. This unique tri-coastal network will provide customers with extensive export capacity to access foreign markets absent warehousing costs or the requirement of double handling.

CNI’s revenues have increased 12.6% sequentially to $275.88 million in the fiscal third quarter ended September 30, 2020. Its non-GAAP Income from operating activities has risen 28.2% sequentially to $18.58 million over the same period, while its non-GAAP EPS has improved 28% sequentially to $0.32.

Analysts expect CNI’s EPS to grow at a rate of 4.9% per annum over the next five years. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in three of the trailing four quarters. The stock has gained 21.7% over the past year.

It is no surprise that CNI is rated “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade and Industry Rank, and a “B” for Peer Grade. It is currently ranked #2 of 20 stocks in the same Industry.

CSX Corporation (CSX)

CSX is a rail-based freight transportation company. The company provides rail, intermodal and rail-to-truck transport solutions to customers across a broad array of markets, including energy, industrial, construction, agricultural and consumer products. It categorizes its products into three primary lines of business: merchandise, intermodal and coal.

CSX signed an agreement in late November to acquire New England’s Pan Am Railways, Inc. to gain  access to North America’s largest regional railroad. The transaction will provide CSX access to multiple ports and large-scale commodity producers, thereby benefiting shippers and local communities.

CSX was recognized by the Dow Jones Sustainability Index (DJSI) North America in November last year, for the 10th consecutive year. This recognition was awarded for CSX’s actions undertaken to reduce fuel consumption and lower emissions through technology and increasingly efficient operations. This recognizes the company's sustainable business practices across governance and economic, environmental, and social dimensions.

CSX’s revenues have increased 17.3% sequentially to $2.65 billion in the third quarter ended September 30, 2020. Income from operating activities has risen 37.7% sequentially to $1.14 billion over the same period, while its EPS has improved 47.7% sequentially to $0.96.

The consensus EPS estimate of $1 for the about-to-be quarter (ended December 31, 2020) indicates a slight improvement year-over-year. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 26.7% over the past year.

CSX’s POWR Ratings reflect this promising outlook. It is rated a “Strong Buy” in our POWR Ratings system. It has an “A” for Trade Grade, Industry Rank and Buy & Hold Grade. Of 20 stocks of the industry, it is ranked #3.

Norfolk Southern Corporation (NSC)

NSC engages in the rail transportation of raw materials, intermediate products, and finished goods in the United States. The company provides the intermodal network, commuter passenger and logistics services along with transporting overseas freight.

NSC entered  a new joint venture, Rail Pulse, in October 2020 to create a technology platform that will facilitate and accelerate the adoption of GPS and other telematics technology across the North American railcar fleet. This will help NSC to increase rail's competitive position relative to other modes by improving visibility into the status, location, and condition of individual railcars, thereby meaningfully contributing to rail industry growth.

NSC’s railway operating revenues have increased 20.2% sequentially to $2.51 billion in the third quarter ended September 30, 2020. Income from railway operations has risen 37.7% sequentially to $840 million over the same period, while its EPS has improved 45.1% sequentially to $2.22.

Analysts expect NSC’s EPS to grow at 7.5% over the next five years. The company has an impressive earnings surprise history; it  beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 27.1% over the past year.

NSC is rated a “Strong Buy” in our POWR Ratings system. It has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade and Industry Rank. In 20 stocks of the same industry, it is ranked #4.

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UNP shares rose $0.03 (+0.01%) in after-hours trading Thursday. Year-to-date, UNP has gained 3.81%, versus a 1.22% rise in the benchmark S&P 500 index during the same period.

Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands.

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