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A CSX train in La Grange, Kentucky on January 13th.
Luke Sharrett/Bloomberg
Freight rail stocks seemed like a potentially safe haven for investors looking to avoid trouble from the slowdown in the economy. Those hopes were derailed this week as railroads reported tight profits and a worrying outlook.
During
S&P500
Index up about 2.5% over the past five days, rail stocks fell 3% to 6% as their December quarter results missed expectations. “It really didn’t matter this week,” Evercore’s Jonathan Chappell wrote in a note on Friday. “If you were a rail reporting fourth quarter earnings this week, your shares were sold aggressively.”
Tuesday,
Union Pacific
(Ticker: UNP) said price hikes helped boost revenue by 8% to $6.2 billion in the December quarter. However, higher expenses caused net income to fall 4%, although a lower share count lifted earnings per share by 0.2% to $2.67. This EPS figure missed Wall Street’s consensus forecast of $2.79.
Union Pacific executives blamed the economy and inclement weather for weak growth in freight traffic, telling listeners on the conference call that the railroad believes it can boost revenue in 2023 through fare increases. But Credit Suisse’s Ariel Rosa, an admirer of Union Pacific with an Outperform rating, wrote that investors find the company’s guidance frustratingly vague and unconvincing. Railroads can’t control shipping volume and Union Pacific acknowledged weakness in consumer demand and industrial production.
Both
Norfolk in the south
(NSC) and
CSX
(CSX) reported Wednesday. Norfolk Southern’s December-quarter revenue of $3.2 billion and earnings of $3.42 per share were in line with expectations, but the company warned that 2023 sales will be flat and earnings growth will be “difficult.” could.
A bad year in 2023 would be a rare occurrence in railroad history, he wrote
MorganStanley
Analyst Ravi Shanker in a Thursday note. Railroads have had only three years of downtime in the past two decades, he noted, and none since the industry adopted cost-efficiency strategies known as “precision-timetable railroading.” He fears 2023 will bring disappointments.
CSX had the strongest results of the group, with revenue up 9% in the December quarter to $3.3 billion and earnings of 49 cents per share, beating forecasts of 47 cents. Management was also the most optimistic, forecasting that sales will grow faster than the broader economy this year.
But Morgan Stanley’s Shanker doubts CSX can avoid an earnings slump in 2023. He ranks both CSX and NSC as underweight and says that at 17 times 2023 earnings per share guidance, the stock hasn’t fully priced in the fact that the industry has already cut costs as much as it has can be expected from the precision railway. Any ambitions to grow rail will run into problems in the form of rising costs and competition from trucking.
“The real question in our mind is whether the earnings level of 2023 is a
cyclical low or the new normal,” wrote Shanker. “We think the latter.”
Write to Bill Alpert at [email protected]
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