CSX Posts Stellar Q1 Earnings: What's Ahead For Railroads?
Zacks Investment Research | Apr 24, 2017 01:43AM ET
It is a well-documented fact that the victory of Donald Trump in the U.S. presidential elections in Nov 2016 has been a blessing for the railroad space. Stock prices of key sector participants like Norfolk Southern Corp. (NYSE:NSC) , CSX Corp. (NASDAQ:CSX) and Union Pacific Corp. (NYSE:UNP) have moved north following Trump’s victory. This is primarily due to the President’s pro-coal stance and emphasis on the need to resurrect the coal industry.
With coal accounting for over 15% of the revenues for Class I railroads in the U.S., any favorable development pertaining to the commodity is naturally a positive for these companies. In fact, the positive impact of Trump’s victory on the sector is evident from the fact that the Zacks categorized Transportation-Rail industry gained 21.8% since Nov 8, handily outperforming the S&P500 index, which appreciated 8.2%.
Impressive Q1 Led by CSX
In view of the positive sentiment surrounding the space and the improvement of coal volumes, it is of little surprise that railroads are faring well in this earnings season, after struggling in the past few quarters. The most impressive earnings report so far in the space has come from the Jacksonville, FL-based CSX Corporation.
The company reported better-than-expected earnings and revenues in the first quarter. Moreover, both metrics improved on a year-over-year basis. The improving scenario regarding coal can be determined from the fact that coal revenues surged 31% year over year to $522 million and volumes improved 3% at CSX.
The strong earnings report on Apr 19 naturally pleased investors. Consequently, shares of the company have surged in excess of 8% since then. The optimism surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for 2017 has improved 7.7% to $2.24 per share, over the last seven days. Also, the company’s Zacks Rank #1 (Strong Buy) further highlights the positive sentiment surrounding it. You can see .
Other key railroad stocks that have reported so far in the ongoing earnings season also include Kansas City Southern (NYSE:KSU) and Canadian Pacific Railway (NYSE:CP) . Both of them reported in line earnings, but better-than-expected revenues. Additionally, their earnings and revenues improved on a year-over-year basis.
Will Other Big Players Perform Well Too?
Get The News You Want
The improving scenario with respect to coal bodes well, as far as the rest of the earnings reports in the sector are concerned. According to the commentary provided by Union Pacific’s CFO, Rob Knight, at the 38th Raymond James Annual Institutional Investors Conference in March things seem to be looking up for this key revenue generating commodity for railroads. Knight said that coal volumes at Union Pacific had improved 15% as of Feb 28. He also added, volumes of agricultural products had improved 3%. Union Pacific is scheduled to report on Apr 27.
Furthermore, Norfolk Southern, which will report on Apr 26, anticipates coal volumes to increase in 2017 on the back of favorable conditions. In fact, our quantitative model hints at earnings beat for Norfolk Southern. According to our quantitative model, a company needs the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase the odds of an earnings surprise.
Norfolk Southern satisfies both these conditions. It has an Earnings ESP of +0.74% and carries a Zacks Rank #3, making us reasonably confident of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter .
Other Positives
Apart from better coal volumes, efforts of railroads to control costs are also likely to drive bottom-line growth. In fact, the attempts of key railroads to reward shareholders through share repurchase and dividends seem to be a positive. CSX had announced an 11% dividend hike while releasing its first quarter results. Additionally, other railroads like Canadian Pacific Railway Ltd. (NYSE:CNI) hiked their quarterly dividend payouts earlier this year.
We believe that the raised dividends highlight the commitment of these companies to create value for shareholders as well as underscore their strong financial condition and bright prospects. Further, the decision of major railroads to make significant investments in order to boost safety and productivity raises optimism.
Bottom Line
The above write-up clearly suggests that things are looking up for the railroad industry. We believe, better coal volumes, Trump’s pro-coal stance, industrial growth, alongside improvement in intermodal volumes and pricing are likely to help the industry turn around.
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