U.S. railroad companies could be just days away from a major strike that could cost the U.S. economy more than $2 billion per day. Strike or no strike, one analyst said Wednesday that railroad stocks have limited upside from current levels in a challenging environment.
The analyst note was published just ahead of Amtrak's canceling all long-distance trains due to the potential strike stemming from the labor dispute between BNSF Railway, Union Pacific Corporation UNP and CSX Corporation CSX.
The Analyst: Bernstein analyst David Vernon downgraded CSX from Outperform to Market Perform but reiterated his $32 price target. Vernon also downgraded Union Pacific from Outperform to Market Perform and cut his price target from $234 to $230.
The Thesis: Representatives from both U.S. railroad carriers and labor unions met with Labor Secretary Marty Walsh on Wednesday to negotiate a deal and potentially avoid a costly strike. The two sides have until midnight on Friday to avoid a labor stoppage.
A potential strike could impact about 60,000 workers and idle more than 7,000 trains. The major sticking points in negotiations are reportedly sick time policies and quality of life issues.
In his downgrade note, Vernon made clear that strike uncertainty is just one of several reasons his enthusiasm for CSX and Union Pacific has waned. He mentioned a coming truck market reset and labor inflation as two elements of a challenging macroeconomic environment for railroads in the second half of 2022.
"Railroads are great companies and offer a lower risk way of participating in the
cyclical rally that will undoubtedly follow a fed pivot, but we find it difficult to make the case to add to US rail exposure here," Vernon said.
Heading into 2023, he said a downturn in construction demand, a strong U.S. dollar and inventory destocking will make it difficult for railroads to generate significant volume growth. Meanwhile, a correction in the trucking market could pressure railroad pricing, hurting margins and profitability.
To make matters worse, the market's expectations for 2023 railroad margins are too high at this point, Vernon said.
"We would be trimming on strength as opposed to adding on weakness, and at current levels believe it will be difficult for these stocks to outperform benchmarks over the next 12 months," he added.
Benzinga's Take: Both CSX and Union Pacific have outperformed the S&P 500 in the past year. While both companies remain quality long-term investments, the strike and other potential near-term headwinds could mean now is a good time for investors to shift to the sidelines and wait for a cheaper reentry point in the next several quarters.
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