Railroad Earnings May Finally Be Turning Around

Credit Suisse’s Allison M. Landry raised the price targets for several Railroad stocks, saying that the first volume beat in four quarters signals an inflection point. She added that so far in 1Q16, rail carloads were tracking ahead of the estimates by an average of 0.6 percent.

Analyst Allison Landry mentioned that although the 1Q16 estimates had been revised down by a modest 1 percent on average, this was largely on account of negative mix, and was “significantly less onerous” than the 5-10 percent cuts that were made intra-quarter during most of 2015.

“[T]he rails have historically begun to outperform the broader market prior to an outright expansion in volumes. As such, we continue to believe that even though the fundamental volume backdrop will likely remain pressured in 2016, the stocks could actually perform well as second-derivative trends improve,” Landry wrote.

Moreover, although Railroad stocks had appreciated over the past one month, climbing 10 percent, as a group they are lagging their trucking and logistics peers, which recoded gains of 21 percent and 12 percent over the same timeframe. “As such, there may be room for the rails to outperform on a relative basis,” the analyst added.

Price Target And Estimate Revisions

• Canadian National Railway (USA) CNI - Rated Neutral, price target raised from $54 to $58. The EPS estimates for FY16, FY17 and FY18 have been revised from $4.64 to $4.62, from $5.11 to $5.07 and from $5.56 to $5.52, respectively.
• Canadian Pacific Railway Limited (USA) CP - Rated Outperform, price target raised from $135 to $152. The EPS estimates for FY16, FY17 and FY18 have been revised from $11.18 to $11.08, from $12.97 to $12.83 and from $15.13 to $14.78, respectively.
• CSX Corporation CSX - Rated Outperform, price target raised from $25 to $27. The EPS estimates for FY16, FY17 and FY18 have been revised from $1.85 to $1.79, from $2.09 to $2.04 and from $2.30 to $2.25, respectively.
• Kansas City Southern KSU - Rated Neutral, price target raised from $71 to $85. The EPS estimates for FY16, FY17 and FY18 have been revised from $4.48 to $4.52, from $5.08 to $5.13 and from $5.76 to $5.81, respectively.
• Norfolk Southern Corp. NSC - Rated Neutral, price target raised from $69 to $77. The EPS estimates for FY16, FY17 and FY18 have been revised from $5.33 to $5.33, from $6.03 to $5.98 and from $6.76 to $6.74, respectively.
• Union Pacific Corporation UNP - Rated Outperform, price target raised from $81 to $91. The EPS estimates for FY16, FY17 and FY18 have been revised from $5.47 to $5.36, from $6.22 to $6.12 and from $7.16 to $7.00, respectively.