Increasing industrialization levels and significant growth of the tourism industry are among the key factors brightening the railroad industry’s prospects. Furthermore, the growing use of railroads for transporting bulk supplies to remote locations, owing to their robust connectivity, should drive the industry’s growth.
Also, increasing government investments in railroad network expansion and the growing trend of railcar leasing will likely have a favorable impact on the railroad sector in the coming years. The global railroad market is expected to grow at a CAGR of 4.4% from 2022 to 2030.
The industry is fast recovering from the pandemic-led setbacks based on rebounding travel demand and increasing freight transportation needs. Therefore, we think it could be wise to add fundamentally sound railroad stocks Union Pacific Corporation (UNP), Canadian National Railway Company (CNI), CSX Corporation (CSX), and Norfolk Southern Corporation (NSC) to your portfolio now.
Union Pacific Corporation (UNP)
UNP operates in the railroad business in the United States through its subsidiary, Union Pacific Railroad Company. Its rail network included 32,452 route miles connecting Pacific Coast and Gulf Coast ports to gateways in the Midwest and Eastern United States as of December 31, 2021.
In July, UNP signed a historic agreement with Wabtec Corporation (WAB) to modernize 600 locomotives with digital solutions and innovations. The deal, worth more than $1 billion, represents the rail industry's largest investment in modernized locomotives in history and is part of UNP's fleet strategy to move more freight efficiently and sustainably across its service territory.
During the second quarter ended June 30, 2022, UNP's total operating revenue increased 14% year-over-year to $6.27 billion. Its operating income grew 1% from the year-ago value to $2.49 billion. The company's net income surged 2% from the year-ago value to $1.84 billion, while its EPS increased 8% from the prior-year quarter to $2.93.
Street expects UNP's revenues and EPS to rise 14.4% and 17.6% year-over-year to $24.95 billion and $11.7, respectively, in fiscal 2022. In addition, its EPS is expected to grow 13% per annum over the next five years.
UNP's POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
UNP also rated a B for Quality, Stability, and Sentiment. Within the B-rated Railroads industry, it is ranked #3 of 15 stocks.
To see additional POWR Ratings for Growth, Momentum, and Value for UNP, click here.
Canadian National Railway Company (CNI)
CNI and its subsidiaries operate in the rail and related transportation industries. It runs a network of 19,500 route miles across Canada and the United States. In addition, the company provides vessels and docks, transloading and distribution, automotive logistics, freight forwarding, and transportation management.
Last month, Keyera Corp. and CNI signed a Memorandum of Understanding to evaluate the development of a specialized clean energy terminal in Alberta's Industrial Heartland. The new infrastructure would collect conventional and clean energy from various sources to support the transportation of Alberta's diverse energy products and further strengthen Canada's green energy future.
On June 30, CNI announced plans to invest approximately $20 million in Iowa in 2022. This includes investments in technology, capacity, rolling stock units, company-wide decarbonization initiatives, and network improvements. These investments will fuel long-term growth and ensure the safe movement of goods in Iowa and throughout CNI's transcontinental network.
For the second quarter ended June 30, 2022, CNI's total revenue increased 18% from the year-ago value to $4.34 billion. Its operating income grew 26% year-over-year to $1.77 billion. The company’s net income surged 26% from the prior-year quarter to $1.33 billion. Its EPS increased 29% from the year-ago value to $1.92.
The consensus revenue estimate of $12.22 billion in fiscal 2022 represents a 6.3% increase from the same period last year.
It is no surprise that CNI has an overall B rating, which equates to a Buy in our POWR Ratings system. The stock also has an A grade for Stability and a B for Quality and Momentum. In the same industry, it is ranked #5.
Beyond the POWR Ratings grades I have just highlighted, you can view CNI ratings for Growth, Value, and Sentiment.
CSX Corporation (CSX)
CSX is a premier transportation company. It offers rail, intermodal, and rail-to-truck transload services and solutions to customers in various markets, including energy, industrial, construction, agricultural, and consumer products.
In June, CSX completed its acquisition of Pan Am Railways, Inc. (Pan Am), broadening its reach into the country's rapidly growing Northeast region. James M. Foote, president and the chief executive officer, said, “This acquisition demonstrates CSX’s growth strategy through efficient and reliable freight service and will provide sustainable and competitive transportation solutions to New England and beyond.”
During the second quarter ended June 2022, CSX’s revenue increased 28% year-over-year to $3.82 billion. Its operating income increased 1% year-over-year to $1.70 billion. The company’s net earnings surged marginally from the prior-year quarter to $1.18 billion, while its EPS grew 4% year-over-year to $0.54.
Analysts expect CSX’s EPS and revenue to grow 20.6% and 17.8% year-over-year to $1.87 and $14.75 billion in fiscal 2022.
CSX's strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our POWR Ratings system. CSX also has a B grade for Quality, Sentiment, and Momentum. The stock is ranked #6 in the same industry.
In addition to the POWR Rating grades I have just highlighted, you can see CSX ratings for Growth, Value, and Stability.
Norfolk Southern Corporation (NSC)
NSC and its subsidiaries transport raw materials, intermediate products, and finished goods via rail in the United States. The company had approximately 19,300 route miles in 22 states and the District of Columbia as of December 31, 2021.
In June, NSC announced OceaNS Bridge Express, a new partnership with Hapag-Lloyd, UNP, and the Port of Virginia to provide expedited service from the East Coast to the Western United States, giving shippers a new option to reach West Coast markets.
For the second quarter ended June 30, 2022, NSC's railway operating revenue increased 16% from the year-ago value to $3.3 billion. Its income from railway operations grew 8.9% year-over-year to $1.27 billion. The company reported a net income of $819 million, while its EPS surged 5.2% from the prior-year quarter to $3.45.
NSC’s EPS and revenue are expected to grow 13% and 13.2% year-over-year to $13.69 and $12.61 billion in the current year. The consensus revenue estimate of $12.93 billion in fiscal 2023 represents a 2.5% increase from last year's period.
It is no surprise that NSC has an overall B rating, which equates to a Buy in our POWR Ratings system. The stock also has a B grade for Stability, Momentum, and Quality. In the same industry, it is ranked #4.
Beyond the POWR Rating grades I have just highlighted, you can view NSC ratings for Growth, Value, and Sentiment.
UNP shares were trading at $200.54 per share on Tuesday morning, down $0.32 (-0.16%). Year-to-date, UNP has declined -19.08%, versus a -21.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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