For Immediate Release
Chicago, IL – December 30, 2016 – Today, Zacks Equity Research discusses the Industry: Railroads, Part 1, including Canadian National Railways Inc. (NYSE:CNI –Free Report),Norfolk Southern Corp. (NYSE:NSC –Free Report),CSX Corp. (NASDAQ:CSX –Free Report),Union Pacific Corp. (NYSE:UNP –Free Report) and Kansas Southern (NYSE:KSU – Free Report).
Industry: Railroads, Part 1
Railroads View Improves Post Elections; Proposed Regulations Raise Concerns
The third quarter of 2016 turned out to be quite impressive for several U.S. industries. However, the scenario was not the same for Railroads, which had a challenging quarter again, albeit better than the second quarter. Quarterly earnings of key railroads drew a mixed picture of the overall performance of the industry. Canadian National Railways Inc. (NYSE:CNI – Free Report), Norfolk Southern Corp. (NYSE:NSC –Free Report) and CSX Corp. (NASDAQ:CSX – Free Report) beat their respective Zacks Consensus Estimate, whereas Union Pacific Corp. (NYSE:UNP – Free Report) and Kansas Southern (NYSE:KSU – Free Report) missed.
The industry is expected to face a host of changes in the upcoming quarters. Some of the main factors influencing the performance of these companies will be higher oil prices, policies following the U.S. elections, possibility of a slight improvement in coal consumption, regulatory challenges, safety concerns, development initiatives and improvements, pricing and capital expenditure.
U.S. Election and Coal Prices
One of the most notable developments in the U.S. has been the election of Donald Trump as the country’s next President. Stock markets have seen one of the best bull runs following Trump’s election. This also bode well for U.S. Railroads as the likelihood of higher coal demand emerged.
Trump has been in favor of fossil fuels instead of renewable energy and has raised questions regarding climate change and its expected widespread impact. Hence, it is quite likely that the use of coal will see a surge under the new President. In fact, coal giants have been witnessing an improvement in their stock performance since the election. Coal has been the key performance dampener for railroads, and any sign of improvement is undoubtedly welcome for these companies.
Additionally, there might be some changes in tax structures and policies, which in turn, could boost trade and the bottom line of these companies. However, market dynamics will have to be closely monitored before a call can be made on whether the election result will benefit the railroads.
A major challenge for railroads is the proposed regulations that might change the face of the industry and its operations. Notably, the regulations that have been proposed by the U.S. Surface Transportation Board (“STB”) have not been welcomed by the Association of American Railroads (“AAR”).
One of the regulations being proposed is Reciprocal Switching, also referred to as Forced Access. According to this proposed rule, railroads will have to provide competitors access to their rail lines without competitive practices and most likely at below market rates. This is expected to have an impact on the efficiency of railroads due to open access to traffic switchover.
Another policy in contention is re-regulation of certain commodities, which were earlier deemed subject to pervasive competition by the STB. The commodities under this policy, per the AAR website, are crushed and broken stone; coke produced from coal; primary iron and steel products; hydraulic cement; and iron and steel scrap, wastes and tailings. The STB, however, has not provided sufficient evidence to suggest that the market conditions of these commodities have changed adversely. Moreover, the commodity groups too have not petitioned for regulation. Thus, the need for this policy change is being questioned by railroads.
Another policy that is under contention is Revenue Adequacy. Under this policy, the Congress has asked STB to effectively cap rates and put a price ceiling on the rates charged by railroads to shippers. The AAR believes this is a form of government price control and would not be in favor of the rail companies. The final decision on these regulations is expected to significantly alter the operations and finances of railroads in the future.
Zacks Industry Rank
Within the Zacks Industry classification, railroads are broadly grouped within Transportation (one of the 16 Zacks sectors).
We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more, visit About Zacks Industry Rank.
As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is ‘Positive,’ between #89 and #176 is ‘Neutral’ and #177 and higher is ‘Negative.’
The Zacks Industry Rank for the railroad industry is currently #71, implying a positive outlook.
As mentioned above, railroads belong to the broader Transportation sector. This sector’s average earnings declined 13.6% in the third quarter of 2016. Outlook for the sector does not look very appealing with an average earnings decline of 20.9% year over year is expected in the fourth quarter of this year.
In the third-quarter earnings cycle, total earnings for S&P 500 Transportation sector companies were down 13.6% from the same period last year due to 2.1% lower revenues. While 66.7% beat earnings estimates, 60% companies surpassed revenue expectations.
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