Railroad stocks Union Pacific Corporation (UNP) and CSX Corporation (CSX) are scheduled to release their third-quarter results on October 19. It may not be wise to invest in UNP and CSX before their upcoming earnings releases for reasons discussed throughout this article. However, closely watching these stocks as they report their results might offer excellent entry points in them.
For the third quarter ended September 30, 2023, UNP’s EPS is expected to decline 20.2% year-over-year to $2.43, while its revenue is expected to decline 8.9% year-over-year to $5.98 billion. Similarly, CSX’s EPS for the third quarter is expected to decline 17.6% year-over-year to $0.43, and its revenue for the same quarter is expected to decline 8.5% year-over-year to $3.56 billion.
The railroad sector is prone to macroeconomic uncertainties. As a result, the financials of these railroad companies are expected to be affected by lower rail volumes and higher operational costs, such as higher labor expenses. The Association of American Railroads (AAR) reported that intermodal traffic for the first eight months of 2023 declined 9.2% year-over-year.
However, U.S. freight railroads originated 1 million containers and trailers in September, increasing 0.7% year-over-year. Before September, intermodal volumes had been trailing the prior year levels. AAR Senior VP John T. Gray said, “Intermodal had the best volume month of the year in September, showing, after three years, that ‘peak season’ still exists although more reserved and occurring somewhat later than past peaks.”
On a year-to-date basis, the total U.S. volumes of carloads and intermodal units stood at about 18.1 million, representing a decline of 4.3% year-over-year. For the week ended October 7, 2023, total U.S. weekly rail traffic came in at 499,217 carloads and intermodal units, rising 3% year-over-year.
According to Susequehanna transportation analyst Bascome Majors, the railroads will continue to depend on volumes for motor vehicles and parts to help boost volumes in the fourth quarter. However, the production disruptions arising from the UAW strikes and weak consumer demand could pressure volumes. He also said that weak demand for house construction could pressure forest product volumes.
Majors said, “Net-net, we remain Neutral on the rail sector into yet another cautious earnings season, but increasingly believe reasons not to own rails more broadly are more behind investors than in front of them today. We continue to actively look for mid-term entry points on any stumbles and remain selectively Positive on story-driven CP while we wait.”
Given the near-term uncertainty surrounding the industry, let’s examine the fundamentals of the two stocks from the Railroads industry, starting with the one ranked lower from the investment point of view.
Stock #2: Union Pacific Corporation (UNP)
UNP operates in the railroad business in the United States. The company offers transportation services for grain and grain products, fertilizers, food and refrigerated products, and coal and renewables to grain processors, animal feeders, ethanol producers, and other agricultural users; petroleum and liquid petroleum gasses; and construction products, industrial chemicals, plastics, forest products, metals and ores, etc.
In terms of the trailing-12-month net income margin, UNP’s 27.18% is 338.8% higher than the 6.19% industry average. Likewise, its 47.35% trailing-12-month EBITDA margin is 250.1% higher than the industry average of 13.53%. Furthermore, the stock’s 14.46% trailing-12-month Capex/Sales is 392.8% higher than the industry average of 2.94%.
On the other hand, UNP’s 0.38x trailing-12-month asset turnover ratio is 53.2% lower than the 0.81x industry average.
For the fiscal second quarter ended June 30, 2023, UNP’s total operating revenues declined 5% year-over-year to $5.96 billion. Its operating income decreased 12% over the prior-year quarter to $2.20 billion. The company’s net income fell 14% year-over-year to $1.57 billion. In addition, its EPS came in at $2.57, representing a decline of 12% year-over-year.
Its operating ratio was 63%, compared to 60.2% in the prior-year quarter. Its cash, cash equivalents, and restricted cash at the end of the period for six months ended June 30, 2023, increased 3.6% year-over-year to $843 million.
UNP failed to surpass the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 6.4% to close the last trading session at $211.34.
UNP’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #10 out of 15 stocks in the Railroads industry. Click here to see the ratings of UNP for Growth, Value, Momentum, Stability, Sentiment, and Quality.
Stock #1: CSX Corporation (CSX)
CSX provides rail-based freight transportation services. The company offers rail services; and transportation of intermodal containers and trailers, as well as other transportation services, such as rail-to-truck transfers and bulk commodity operations. It transports chemicals, agricultural and food products, minerals, automotive, forest products, fertilizers, metals and equipment; and coal, coke, and iron ore.
On June 22, 2023, CSX and Canadian Pacific Kansas City (CP) announced their intent to enter a joint venture to build and deploy hydrogen locomotive conversion kits for diesel-electric locomotives.
CSX’s president and CEO, Joe Hinrichs, said, “CSX looks forward to working as a partner with CPKC in the development of the hydrogen locomotive program as it demonstrates our commitment to implement alternative fuel solutions that could further enhance our emissions performance and offer our customers an even more environmentally-friendly transportation solution.”
In terms of the trailing-12-month gross profit margin, CSX’s 50.09% is 65.1% higher than the 30.35% industry average. Likewise, its 39.67% trailing-12-month EBIT margin is 304.6% higher than the industry average of 9.80%. Furthermore, the stock’s 16.61% trailing-12-month levered FCF margin is 193.6% higher than the industry average of 5.66%.
On the other hand, CSX’s 0.37x trailing-12-month asset turnover ratio is 54.6% lower than the 0.81x industry average.
CSX’s revenue for the second quarter ended June 30, 2023, declined 3% year-over-year to $3.70 billion. Its net earnings fell 15% year-over-year to $996 million. In addition, its EPS came in at $0.49, representing a decline of 9% year-over-year.
Its total merchandise increased 3% year-over-year to 677 thousand units. Also, its operating ratio was 59.9%, compared to 55.4% in the prior-year quarter. Its cash and cash equivalents at the end of the period for six months ended June 30, 2023, increased 32% year-over-year to $956 million.
CNX surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 11.4% to close the last trading session at $31.37.
CNX’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system.
Within the same industry, it is ranked #8. It has a C grade for Stability and Sentiment. To see the other ratings of CNX for Growth, Value, Momentum, and Quality, click here.
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UNP shares were trading at $207.48 per share on Wednesday afternoon, down $3.86 (-1.83%). Year-to-date, UNP has gained 2.15%, versus a 14.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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