Why It May Be Time To Hop Aboard The Rail Sector Ahead Of Q1 Earnings

According to UBS, now may be an opportune time to jump into the rail sector ahead of first-quarter earnings releases of several of the top players this month.

“Rail volumes have generally been better than expected in Q1 with CNI, NSC, and KSU realizing stronger volume growth while the mix appears supportive for CSX and UNP,” said UBS analyst Thomas Wadewitz.

Estimates Raised

The Swiss bank said it was raising first-quarter estimates on four of the six rails it covers, with updated estimates above consensus on Canadian National Railway (USA) (NYSE: CNI), CSX Corporation (NASDAQ: CSX) and Kansas City Southern (NYSE: KSU), which is seen to show upside against low expectations.

Rail industry stocks may be benefitting from low expectations, however, there has been solid industry volume growth of 4.5 percent year-over-year in Q1, which has been supported by strength in coal and grain, as well as steel and frac sand. UBS is anticipating upside in Q1 for rail stocks, despite a notable diesel fuel headwind given the favorable outlook commentary seen surrounding the industry. Continued growth in exporting of coal is also expected given recent weather disruptions causing rail operation delays in Australia.

“We believe the combination of an improved volume trend, a modest upside EPS report, and a decline in broader concern about trade could support attractive upside potential for KSU in the near term. We also expect 1Q EPS/ the conf call to be a catalyst for CSX stock driven by initial comments from CSX’s new CEO, which are likely to provide high level perspective on the opportunity for improvement in CSX’s large network of classification yards,” concluded Wadewitz.

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