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Threat of Work Stoppage by Railroads Looms Large: An Analysis

·3 min read

Stocks in the railroad space have been hitherto hit hard by headwinds like supply-chain woes, labor woes and high fuel costs. Due to supply-chain disruptions and slower network velocity, overall volumes declined 3% year over year at Norfolk Southern NSC in second-quarter 2022. Also, high fuel costs unfavorably affected the operating ratio (operating expenses as a % of revenues) by 130 basis points at Union Pacific Corporation UNP in second-quarter 2022. Escalated expenses on fuel also resulted in the deterioration of operating ratio at another railroad operator — CSX Corporation CSX — in the June quarter.

All three stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Due to the above-mentioned headwinds, the Zacks Transportation-Rail industry has underperformed the S&P 500 Index over the past six months. The stocks in this industry have collectively lost 4.4%, while the Zacks S&P 500 composite has declined 2.4%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

However, supply-chain woes seem to be easing and fuel prices are also coming down. Per the Association of American Railroads data, U.S. weekly rail traffic increased 3.7% for the week ended Sep 3, 2022, compared with the same-week reading in 2021.

Nonetheless, this improving scenario is likely to take a beating shortly as the specter of a strike by the railroads over labor-related woes looms large. Railroads, including the likes of CSX and Union Pacific are reportedly aiming to stop transporting sensitive cargoes ( chemicals used in fertilizer and chlorine for purifying water) and hazardous materials in case talks with the two labor unions (Brotherhood of Locomotive Engineers and Trainmen, and SMART-Transportation Division) fail to yield a favorable result by this Friday (Sep 16). The two groups represent more than 60,000 of railroad union workers.

Railroads either inked deals or are completing the formalities of reaching tentative agreements with 10 labor unions. Discussions are on with the remaining two unions, as already mentioned above. In the event of an agreement on the labor dispute not being reached by Friday the unions can go on strike.

We note that the deadline was set by the President Biden-appointed federal panel (Presidential Emergency Board) in July this year. The board, set up to avert a strike, recommended substantial wage hikes for railroad employees (highest wage increase in the history of rail-labor negotiations, per a Norfolk Southern press release). The recommendations are non-binding in nature.

It is important to note that as dialogues with two labor unions have not yet yielded the desired results, the possibility of a work disruption lingers. If the strike materializes, the supply-chain woes will be further aggravated and deal a huge blow to customers already suffering sky-high inflation.

A nationwide railroad strike would hit the economy very hard. The walkout may cost the already fragile economy more than $2 billion a day. To avert this unfortunate scenario, the president recently made calls to the representatives of unions and railroad operators.

Norfolk Southern’s management is already restricting the movement of some intermodal shipments. However, NSC assured that it will resume normal operations as soon as possible if the outcome of the ensuing events is favorable.

We expect investors to follow the updates on this burning issue in the coming days.

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