UBS Still Buying Blue Chip Railroad Stocks

UBS’ Thomas Wadewitz stated that while mid-cycle implied modest upside, mix and coal headwinds were likely to persist.

While saying that the current conditions in various key rail markets continued to be challenging and a strong inflection in rail EPS performance was unlikely, analyst Thomas Wadewitz commented that the framework appeared to have changed “from a significant probability of recession to the assumption that sluggish economic growth will continue.”

There has been an improvement in the y/y trend of weekly rail volumes, as well as stability in the macro data. While railroad volumes had improved, more challenging comps in March and April could result in y/y volume trends getting weaker, Wadewitz mentioned.

“We suspect the improvement in volumes has provided support for the rail stocks while the significant headwind from unfavorable mix may be overlooked,” the analyst wrote.

Recommendations

“While current conditions for the rails remain challenging, we believe it is important to consider that EPS expectations and the stocks fell sharply in 2015,” the UBS report stated. The valuations did not appear compelling, especially following the upward movement of stocks over the past several weeks.

Wadewitz said, however, that rail stocks could be supported if macro data remained broadly stable and if investors continued to “believe the most likely scenario for the US is one of slow economic growth.” There seems to be modest upside for rail stocks and pullbacks are likely to be modest as well.

The analyst named the favorites as Kansas City Southern KSU, Union Pacific Corporation UNP and Canadian Pacific Railway Limited (USA) CP. All three have Buy ratings.

Raising Price Targets

• CSX Corporation CSX – from $25 to $27
• Norfolk Southern Corp. NSC – from $75 to $84
• Union Pacific – from $82 to $91
• Kansas City Southern – from $80 to $98
• Canadian Pacific Railway – from C$178 to C$196