Union Pacific Corporation (UNP) and CSX Corporation (CSX) are two prominent players in the railroad industry. UNP hauls agricultural, automotive, and chemical products and offers long-haul routes from all major West Coast and Gulf Coast ports to eastern gateways connects with Canada’s rail systems, and serves the major gateways to Mexico. In comparison, CSX provides rail, intermodal, domestic container shipping, barging, and contract logistics services worldwide. It transports chemicals, minerals, agricultural and food products, coal, and iron ore to electricity-generating power plants, steel manufacturers, industrial plants, and exports coal to deep-water port facilities.
Although the resumption of economic and industrial activities enabled the railroad industry to rebound from pandemic lows, it has remained more or less turbulent in accordance with COVID-19 cases and persisting global supply chain disruptions last year. This, along with high inflationary pressures, has surged the demand for fuel-efficient railroad or intermodal transportation and allowed companies in this space to benefit substantially.
However, the ban of Russian oil imports and surge in oil and commodity prices, along with lockdowns in major Chinese cities, has raised concerns over the global supply crisis once again. As an increase in domestic production would be a primary focus now, the demand for fuel-efficient rail and intermodal services should surge. Moreover, significant funding from the bipartisan Infrastructure Bill to improve rail infrastructure should drive the industry’s growth. The global rail market is expected to grow at a 4.3% CAGR to $974.20 million by 2026. So, both UNP and CSX should benefit substantially.
While CSX lost 4.7% over the past three months, UNP gained 5.3%. UNP is a clear winner with 2.3% gains versus CSX’s negative returns year-to-date. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On March 8, 2022, UNP announced it would begin using a higher biodiesel blend in locomotives it acquired from Wabtec Corporation (WAB), a leading global provider of technology products and services for the rail industry. UNP will begin testing B20 biodiesel and R55 renewable diesel on trains powered by Wabtec FDL engines in the second quarter. This collaboration will help UNP increase the percentage of low-carbon fuels consumed to 10% of its total diesel consumption by 2025 and 20% by 2030.
On October 8, 2021, CSX launched its Responder Incident Training (RIT) Train, a new leading-edge train designed to deliver advanced, tailored hazardous materials safety training events for emergency first responders throughout its 23-state network. This RIT train will allow CSX to expand the reach of its safety program and strengthen its partnerships with emergency personnel. This represents CSX’s efforts to become the best railroad in North America.
Recent Financial Results
UNP’s total operating revenues for its fiscal 2021 fourth quarter ended December 31, 2021, increased 11.5% year-over-year to $5.73 billion. The company’s operating income came in at $2.44 billion, indicating a 21.6% year-over-year improvement. While its net income increased 24% year-over-year to $1.71 billion, its non-GAAP EPS grew 29.8% to $2.66. As of December 31, 2021, the company had $960 million in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended December 31, 2021, CSX’s revenue increased 21.3% year-over-year to $3.43 billion. The company’s operating income came in at $1.37 billion, representing a 12.4% rise from the prior-year period. Its net earnings came in at $934 million, up 22.9% from the prior-year period. CSX’s EPS came in at $0.42, up 27.3% from the year-ago period. The company had $2.24 billion in cash and cash equivalents as of December 31, 2021.
Past and Expected Financial Performance
UNP’s EBIT and levered free cash flow have increased at CAGRs of 3.2% and 11.2%, respectively, over the past three years.
UNP’s EPS is expected to grow 16.1% year-over-year in fiscal 2022, ending December 31, 2022, and 11% in fiscal 2023. Its revenue is expected to grow 8.5% year-over-year in fiscal 2022 and 5.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 16.8% rate per annum over the next five years.
In comparison, CSX’s EBIT and levered free cash flow have increased at CAGRs of 1.9% and 4.5%, respectively, over the past three years.
Analysts expect CSX’s EPS to rise 16.1% year-over-year in its fiscal year 2022, ending December 31, 2022, and 8.3% in fiscal 2023. Its revenue is expected to increase 11.3% year-over-year in fiscal 2022 and 3.1% in fiscal 2023. The company’s EPS is expected to grow at a 16.5% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, UNP is currently trading at 1.98x, 48.9% higher than CSX’s 1.33x. In terms of forward EV/Sales, CSX’s 6.53x compares with UNP’s 8.34x.
Profitability
UNP’s trailing-12-month revenue is almost 1.7 times CSX’s. UNP is also more profitable, with a 58.5% gross profit margin versus CSX’s 53.1%.
Furthermore, UNP’s ROE, ROA and ROTC of 41.9%, 9.3% and 12.9% compare with CSX’s 28.4%, 8.1% and 10.8%, respectively.
POWR Ratings
While UNP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CSX has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both CSX and UNP have a B grade for Quality, in sync with their higher-than-industry profitability ratios. UNP’s trailing-12-month levered free cash flow margin of 21.9% is 410.4% higher than the 4.3% industry average. CSX has a 21.7% trailing-12-month levered free cash flow margin, 406.9% higher than the industry average of 4.3%.
In terms of Momentum, both UNP and CSX have been graded an A, reflecting their impressive price gains over the past year. UNP has surged 26.7% over the past six months, while CSX returned 12.2%.
Of the 16 stocks in the B-rated Railroads industry, UNP is ranked #3, while CSX is ranked #4.
Beyond what we have stated above, our POWR Ratings system has also rated CSX and UNP for Stability, Sentiment, Growth, and Value. Get all CSX ratings here. Also, click here to see the additional POWR Ratings for UNP.
The Winner
Given the industry’s long-term growth prospects and the heightened demand for fuel-efficient railroad services, both CSX and UNP should benefit. However, higher profitability makes UNP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Railroads industry.
UNP shares were trading at $260.24 per share on Tuesday afternoon, up $2.58 (+1.00%). Year-to-date, UNP has gained 3.80%, versus a -10.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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