After years outperforming the market, freight-rail stocks have stalled.
Norfolk Southern
stock is down 10% this year, compared to
S&P 500’s
15% rise.
Union Pacific
and
Canadian National Railway
are roughly flat, while
Canadian Pacific Kansas City
and
CSX
are up around 5%.
A catch-up may be at hand, writes Evercore ISI analyst Jonathan Chappell. Rail stock valuations fell below 17 times 2024 earnings—trailing the S&P 500’s 19. That compression exceeds the risk of further disappointments, he says.
Norfolk Southern operations staggered after its East Palestine, Ohio, derailment. The railroad’s East Ohio mainline won’t fully reopen until midsummer. Volumes are down. Costs are up. Chappell’s full-year forecast is $12.83 in earnings, 6% below 2022. But with Norfolk stock near 16 times his 2024 forecast of $13.73 a share, he rates the shares at Outperform, with a target price of $247 from $220. It’s his top pick. He’s not alone.
Wells Fargo
analyst Allison Poliniak-Cusic also raised her target to $250.
Volumes at other rails have also disappointed. But while trimming forecasts, Chappell has Outperform ratings on the stocks. He thinks CSX can rise to $36 from $33 on rising freight volumes. In the June quarter, CP began integrating its Kansas City Southern acquisition. As analysts get a sense of cost savings, Chappell sees the stock rising to $84 from $78. UP needs a new CEO and is working to improve service and volumes; that could lift the stock to $228 from $202.
Even the regulatory threat may be fading, he notes. After Norfolk’s derailment, the industry braced for expensive new safety legislation. But despite bipartisan support, legislation never got to the Senate floor.
Next Week
Monday 6/26
Carnival reports second-quarter fiscal-2023 results.
Tuesday 6/27
Jefferies Financial Group
and
Walgreens Boots Alliance
announce earnings.
Delta Air Lines
holds its 2023 investor day.
The Census Bureau releases the durable goods report for May. Economists forecast that new orders for manufactured durable goods declined 1% from April to $280 billion.
The Census Bureau reports new-home sales data for May. Consensus estimate is for a seasonally adjusted annual rate of 659,000 new single-family homes sold, 24,000 fewer than in April. The median sales price was $420,800 in April, 15.3% less than the record high of nearly $500,000 from last October.
Wednesday 6/28
Micron Technology
reports third-quarter fiscal 2023 results. The company is expected to lose $1.58 per share on sales of $3.7 billion, compared with a profit of $2.59 a share on $8.6 billion of revenue a year earlier. Yet, Micron stock is up 31% this year on hopes that demand has bottomed.
General Mills
releases fourth-quarter fiscal-2023 results.
The Federal Reserve releases the results of its annual stress test of the nation’s largest lenders. The test is a key factor in determining how much banks can return to shareholders via stock buybacks and dividends as it sets the capital cushion that banks must maintain to withstand a series of market and economic shocks. Banks with $100 billion or more in assets are subject to the stress test, with larger banks required to participate annually, and banks with $100 to $250 billion in assets required to participate every other year.
Thursday 6/29
McCormick,
Nike,
and
Paychex
host conference calls to discuss earnings.
The Bureau of Economic Analysis releases its third and final estimate of gross-domestic-product growth for the first quarter. Expectations are for GDP to have increased at an annual rate of 1.4%, a tenth of a percentage point more than the BEA’s second estimate from late May.
Friday 6/30
Constellation Brands
reports first-quarter fiscal-2024 earnings.
The BEA reports personal income and expenditures for May. The consensus call is for income to rise 0.4% month over month, matching the April data. Spending is seen increasing 0.3%, following a 0.8% gain in April. The Federal Reserve’s favored inflation gauge, the core personal-consumption expenditures price index, is expected to increase 4.7% year over year, unchanged from April.
The Institute for Supply Management releases the Chicago Business Barometer for June. Economists forecast a 44.2 reading, almost four points more than in May. The index has had nine consecutive readings below the expansionary level of 50.
Write to Bill Alpert at [email protected]
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