Railroad stocks to watch as international trade rebounds
Covid-19, lockdowns, trade spats, rising commodity prices and supply chain problems have affected shares in train operators.
Each of the five biggest railway-related stocks by market cap is based in North America. Their futures are tied to the actions of US policymakers, and the behaviour of customers and businesses.
Freight dominates the market cap of publicly quoted rail companies. Passenger travel is supported by the government, making it less sensitive to changes in commodity prices.
Railway companies in the share market have enjoyed healthy growth in 2021, but risks abound that may change things.
US investment: Build Back Better
One of US President Biden’s key plans for this term has been to deliver the infrastructure bill, passed on 15 November 2021.
The bill features $66bn in provisions for passenger and freight rail transport, including $22bn in grants to Amtrak, $24bn for modernization of the US northeast corridor and $12bn for inner-city rail services.
Amtrak is not listed publicly, but this mammoth investment could help the fortunes of railway companies that are. Modernising the northeast corridor could help cross-country freight efficiency and demand.
International trade rebounding
Almost half of commodity freight beginning or finishing its rail journey in the United States is ‘intermodal’ – containers loaded between trains, trucks and ships. Accordingly, the fortunes of public railroad companies have been irrepressibly tied to the fate of international trade.
In that light, signs that international trade is returning matter. Total US trade looks to be recovering to peak levels, after the impact of the US-China trade war was exacerbated by the Covid-19 pandemic. Intermodal traffic units hit their highest numbers on record in April, albeit briefly, and should offer optimism going forward, despite recent supply-side disruptions.
A thawing of relations between China and the US on climate and cooperation between the world’s two largest economies may pave the way for further concessions, possibly leading to increased demand for products and transporters.
Other commodities, like coal and chemicals, which make up a fair share of the total goods transported, could experience a jump in demand in the short-term from any wider cyclical spikes in the economy. Supply constraints for coal are expected to ease towards the end of the year.
Supply chain disruptions, labour shortages and inflation
Supply chain disruptions have been a persistent thorn in the side of a global economy attempting to recover from Covid-19 lockdowns, with materials and labour shortages exacerbating inflation spikes and choking extended expansionary monetary policy.
The rail sector has not been exempt from these issues, both in the rate at which goods are shipped and any underlying issues hindering their operations.
Labour costs are also a factor. Union Pacific Railroad has 31,000 employees working across the west of the US. On 16 November, the company released an insight explaining its broader issues with supply chain disruption.
“Major factors like the pandemic, shifts in consumer purchasing patterns, labour shortages in the trucking and warehousing industries, and equipment shortages are all responsible in part for delivery delays,” the company said.
Employment in the US rail industry as a whole was falling before the pandemic struck. The provisional 141,900 employees in the rail transportation sector in October 2021 is down from the 183,600 in January 2019.
Wages in rail transport sub-sectors range from $25.44 to $34.09 an hour, straddling the national average and risking prohibitive future increases if supply continues to struggle to keep up with demand.
Carriage loads remain down on pre-Covid levels, while intermodal traffic for September 2021 was down 14.1% on April 2021 levels.
All this has filtered through to the cost of transport. Cass Information Systems has tracked the rates on freight of trucks, rails, and parcels among others – it’s calculated by dividing total expenditure by the number of shipments. Since June, the year-on-year rise in this measure has exceeded 20%, compared with the same month a year earlier, hitting 36.2% for October 2021.
In turn, the Producer Price Index (PPI) for US rail transport is rising quickly – while recent spikes haven’t compared with wider PPI over the last 12 months, the higher base of rail transportation implies expenses could soon become disruptive to operations.
Railway stocks to watch
With passenger-first railroad groups typically nationalised or private, the publicly traded railway market is dominated by freight transport services, particularly those from North America. Railway stocks have reflected industry-focused trends through the last year.The following is a list of the biggest publicly traded railroad companies globally by market capitalisation.
Union Pacific Corporation
The biggest railway stock to invest in is Union Pacific Corporation (NYSE:UNP). It operates in 23 US states.
While acknowledging supply chain disruptions, the company presented encouraging earnings results for the third quarter of 2021. UNP recorded earnings per share (EPS) of $2.57, up 28% from a year ago, while operating revenue was up 13% to $5.6bn.
In line with wider industry disruption, the company failed to grow its carload units. Despite that and higher fuel costs, UPN managed to push its operating ratio down by 2.4 percentage points (ppts) to 56.3%.
The company has enjoyed a strong rebound in 2021 as pent up demand helped make up for supply side constraints. Year-to-date, the share price has increased by 17.14%.
Canadian National Railway
Across the border, the Canadian National Railway (NYSE:CNI) continued the trend of strong returns in the face of supply disruption. The company spans Canada and Mid-America, and services ports on three coasts in the two countries.
Third-quarter adjusted EPS was C$1.52, while operating ratio fell by 90 basis points to 59%, as revenue increased by 5% to C$3.59bn.
The group did, however, begin to feel the pinch over expenses over the last year. Fuel costs jumped by 40% in constant currency rates, which strip out the impact of exchange rate fluctuations, while labour costs increased by 12%, pushing total adjusted operating expenses up by 7%.
Stock is up 17.73% year-to-date, at a current price of $129.33 (24 November) and a market cap of $91.67bn.
CSX Corporation
CSX Corporation (NASDAQ:CSX) operates across 23 US states in the US, and in Canada’s District of Columbia, Ontario and Quebec.
The railway company posted strong third-quarter earnings, with the EPS of $0.43 eclipsing the EPS of $0.32 last year. Third-quarter revenues increased by 24% to $3.29bn.
Stellar results on the income side helped push the operating ratio down from 56.9% to 56.4%. A 30% increase in transport revenue from metals helped offset a 23% decrease in automation as semiconductor shortages weighed on supply.
The stock price increased 19.17% year-to-date.
Norfolk Southern
Based in Norfolk, Virginia, Norfolk Southern Corporation (NYSE:NSC) operates across 22 US states and the District of Columbia.Its largest markets are intermodal (27%), and agriculture, forest and consumer products (22%).
Latest earnings indicate railway operating revenues for the third quarter rose by 14% against the same period last year, hitting $2.85bn. EPS of $3.06 was up 22% from a year ago. The group's operating ratio saw a significant decrease from 66.5% to 60.2%. Automotive revenue was down by 19%, although coal demand helped increase revenues by 32%.
Despite a strong 2021 overall, with its share price up 16.60% year-to-date, NSC has experienced a hiccup in the last month, the stock falling 3.31%. It’s currently (24 November) trading at $277.06, with a market cap of $67.42bn.
Canadian Pacific Railway
Canadian Pacific Railway (NYSE:CP) is the second Canadian-based operator in our list of the biggest railway sector stocks.
Third-quarter earnings produced a mixed bag for CPR, the numbers affected by the group’s acquisition of Kansas City Southern. Revenue increased by 4% against the third quarter of 2020 to $1.9bn. Diluted EPS fell 20% to $0.70, and the operating ratio increased by 200 basis points to 60.2%.
Metals, chemicals and coal were the company’s biggest revenue gainers, though grain transport’s 21% tumble in revenue contributed to a 21% reduction in net income.
Like NSC, CPR stock has gone through a rough patch after rallying through October. The share price has fallen by 3.05% in the last month, with year-to-date increases of 6.45% the lowest of the top five companies.
The company’s shares fell last month on news that it was lowering its outlook for EPS as a result of grain shortages. The current share price of $74.27 gives a market cap of $49.73bn.
FAQs
Are railroad stocks a good investment?
New infrastructure investment in North America and rebounding international trade could boost railway sector stocks further, yet there are risks associated with supply chain disruptions, labour shortages and inflation.
Why have railroad stocks been going up?
Railroad stocks have risen through the year on the back of strong demand-led recoveries from Covid-19, although some companies are struggling more than others with falling supply.
What railroad companies are publicly traded?
Publicly traded railroad companies, particularly the biggest ones based in North America, specialise in freight transport. Union Pacific Corporation, Canadian National Railway and CSX Corporation are among the world’s biggest publicly traded railroad companies.
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