3 Railroad Stocks Facing The Brunt Of Low Crude Prices

In the meeting held at the Austrian capital of Vienna on Thanksgiving, the international cartel of oil producers – Organization of the Petroleum Exporting Countries (OPEC) – took the decision to not curtail oil production, despite an oversupply in the market. As a result, crude oil prices continue to steep downtrend in 2014.

 

Furthermore, the North American shale supplies in the wake of lackluster demand expectations has forced oil prices to stay below $70 per barrel, which in turn may not only compress revenues for railway carriers but also increase competition among trucking companies.

 

Most of all rail stocks were hit hard by OPEC's stand. However, we have taken into account three rail stocks which witnessed highest decline in the last two weeks. The companies, which are Canadian Pacific Railway Ltd. CP, Canadian National Railway Co. CNI and Norfolk Southern Corp. NSC, fell 20.1%, 15.4% and 14.1%, respectively. Likewise, Kansas City Southern KSU also lost 12% over the same time frame.

 

Railway carriers face intense competition from various transportation providers including railroads and motor carriers, barges and ships that operate along similar routes across its service area. Hence, lower oil prices will help these companies, especially the trucking companies, offer attractive rates to clients, thereby allowing rail companies to lose significant amount of business while moving ahead.

 

Generally, petroleum forms an integral part of revenue segment for rail road companies. As per the Association of American Railroads, petroleum products constitute nearly 5% of total carloads (exclusive of intermodal) shipped year-to-date through Nov 22, 2014. Hence, curtailing oil production will also hurt the industry's profitability.

 

Kansas City Southern has a Zacks Rank #2 (Buy) while both Canadian Pacific Railway Canadian National Railway, Limited and Norfolk Southern Corp. have a Zacks Rank #3 (Hold).