Market Overview

Is It Time To Ride Rail Stocks?

Is It Time To Ride Rail Stocks?
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According to a recent report, Morgan Stanley analysts believe 2015 and 2016 could be big years for U.S. rail companies Union Pacific Corp (NYSE: UNP), CSX Corp (NYSE: CSX), and Norfolk Southern Corp (NYSE: NSC).

Analysts see tight capacity, increasing truck pricing, and inflation as driving forces behind a projected doubling of rail core price growth in 2015.

Trucking Leads The Way

While analysts have no direct indicator of rail capacity utilization, analysts turn to trucking numbers as an indication of what to expect in rails. A recent survey of shippers reveals that industry insiders believe that trucking capacity is now above previous peak capacities reached in 2004 and 2006.

Related Link: Morgan Stanley Expects A Big Year For This Big Bank In 2015

Analysts predict similar capacity tightening for the rail companies as well.

Pricing Power

Analysts believe that demand growth will outpace capacity growth for rails in 2015, and this environment will lead to increased pricing power. If trucking prices rise 4 to 5 percent, rail prices are expected to increase at least that much as well.

A large utility company recently told Morgan Stanley that one rail service provider is already asking for a 5 to 10 percent pricing increase in 2015.

Rising Margins

Morgan Stanley analyst William J. Greene makes a strong case for a big boost in incremental margins at the rail companies in 2015.

“If we assume ~3% total carload growth, with 50% incremental margins on volumes, mid-single-digit core pricing gains, 2.5% inflation, and then add back productivity headwinds experienced in 2014 as well as incremental productivity gains for 2015, we think incremental margins of 70-90% are achievable,” he wrote.

Analysts expect the beneficial environment for rail companies to continue into 2016.

Image credit: Kool Kats Photography, Flickr

Latest Ratings for UNP

Jan 2017BuckinghamInitiates Coverage OnNeutral
Jan 2017BarclaysUpgradesEqual-WeightOverweight
Nov 2016Deutsche BankInitiates Coverage OnBuy

View More Analyst Ratings for UNP
View the Latest Analyst Ratings

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