Here's Why Rail Road Stocks, Including Genesee & Wyoming, Rallied in November
What happened
Shares of Genesee & Wyoming (NYSE: GWR) rose 8.9% last month, which was quite a jump considering that the stock had been relatively flat this year. While the company unveiled a bullish long-term outlook at its investor day, the primary fuel of last month's big move was optimism that Congress would pass a massive tax overhaul, which would reduce rates for corporations like railroads.
So what
Genesee & Wyoming joined fellow railroad stocks Kansas City Southern (NYSE: KSU), Norfolk Southern (NYSE: NSC), and Union Pacific (NYSE: UNP) in rallying last month on the hope that Congress would pass President Trump's tax cut plan. Genesee & Wyoming led that group by jumping 8.8% in the just last three days of the month followed by an 8% jump from Union Pacific and 6% gains from Kansas City Southern and Norfolk Southern. Fueling that late surge was the market's view that it was increasingly likely that the Senate would have the votes needed to pass the sweeping tax reform package.
Image source: Getty Images.
The reason those stocks rallied so sharply is that the reform plan would significantly improve railroad earnings by reducing their tax rate. For example, last quarter Genesee & Wyoming made $83.9 million in income before taxes but only reported $53.4 million in net income, implying a 36% tax rate. Given that the tax plan proposes to reduce the corporate rate in the U.S. to 20%, Genesee and Wyoming and its railroad peers would clearly benefit once it goes into effect.
That said, even if tax reform falls apart before reaching the President's desk, Genesee & Wyoming remains well positioned to deliver significant earnings growth in the coming years. The company recently unveiled its new five-year plan, where it forecast 15% to 20% long-term earnings-per-share growth. Driving that projection is the expectation that same-railroad revenue will rise 5% to 10%, which the company will compliment by making about $300 million per year in new investments and acquisitions to expand its global rail network.
Now what
Genesee & Wyoming's stock gained quite a bit of steam as the Republican tax cut plan neared the finish line last month. Because of that, it's possible that the stock could come back to earth if the reform package falls apart or the market takes a breather. If that happens, it could represent an excellent opportunity for long-term investors to consider buying shares of this railroad stock given its earnings growth potential without the impact of the tax plan.
More From The Motley Fool
6 Years Later, 6 Charts That Show How Far Apple, Inc. Has Come Since Steve Jobs' Passing
Why You're Smart to Buy Shopify Inc. (US) -- Despite Citron's Report
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Genesee & Wyoming. The Motley Fool has a disclosure policy.
