There hasn’t been much reason to smile for the broad markets, and major railroad stocks are no exception. In fact, the Dow Jones U.S. Railroad Index was among the worst performers for the year to date, down 7.1% as of this writing.
On a more discouraging note, the decline in railroad stocks outpaces that of the blue chips, with the Dow Jones Industrial Average shedding a little under 6% since Jan. 4. The often overlooked sector certainly faces substantial troubles ahead, but an even greater challenge hangs ominously over both Wall Street and Main Street.
Making the headlines for Bloomberg is Bank of America’s cautionary statement on railroad stocks, warning that the decline in railway shipments last year — the most in a six-year period — has bearish implications for the underlying economy.
Worse yet, the condition is only accelerating. Per-car freight, on a year-over-year comparison, has been running negative by 5% or more over the past 11 weeks. Such pronounced weakness in railroad stocks haven’t been seen since 2009; and when they do occur, BofA analysts warn that they often signal a broader recession ahead.
For instance, a total decline in freight could be explained due to the lessened dependence on coal as an energy source or the general deflation in the commodities sector. The trend in intermodal transportation — or the shipment of goods across multiple modes — has taken a dive in the fourth quarter of 2015 as compared to the first two quarters.
Since intermodal transport is often associated with consumer goods, the impact is presumably on a wider scale instead of being localized to a specific industry.
In the face of solid data contesting to the contrary, a Bloomberg survey revealed that Wall Street analysts have a fairly bullish outlook this year on railroad stocks, expecting the sector as a whole to move up 20% in the markets.
This would be quite a feat.
Not only are the fundamentals heavily pressuring railroad stocks, the aforementioned Dow Jones railroad index absorbed a 31% haircut for 2015. A substantive recovery would have to originate from something other than just mere technical trading.
Unfortunately, it appears that several analysts are guiding their clients to disaster. Here are three railroad stocks in particular that are tugging a dangerous line.
Railroad Stocks Under Duress: Union Pacific Corporation (UNP)
Union Pacific Corporation (UNP) is not only hampered by an extremely rough industry, it’s facing stiff competition by a proposed merger between fierce rivals Canadian Pacific Railway (CP) and Norfolk Southern Corp. (NSC).
At issue — besides the obvious joining of forces — is the potential jump in congestion at critical hubs should the two entities scheme to favor their railcars’ traffic over those of their competitors.
It may sound like splitting hairs — and perhaps a bit of petty nationalistic pride on the part of UNP … but it does have a point.
Last year in Chicago, unusually cold weather and a massive jump in crude oil shipments created a gridlock that significantly jammed the city’s entire railroad system, ultimately drawing the attention of regulators. Anything that may cause a repeat of that scenario would be bad for all railroad stocks, causing unnecessary delays to the business of unrelated industries.
UNP has argued that the merger may end the relative stability of the sector 15 years after the last major consolidation.
Even if the deal falls through, UNP is in big trouble. Last year, the company surrendered nearly 33% in spectacular fashion, and this year isn’t off to a great start, with UNP down roughly 4%.
Granted, UNP stock has gained 2.4% in the last two sessions, but these are really token, meaningless trades. The scale of bearishness is such that at current prices, UNP is down to levels that are on par with the second-half of 2013.
Despite the prominent status of UNP, most investors are evidently seeing little reason to put their capital at risk.
Railroad Stocks Under Duress: CSX Corporation (CSX)
It’s crunch time for CSX Corporation (CSX) and the odds don’t look so great.
Already, CSX stock is hitting double-digit losses for the year, underperforming the Dow Jones railroad index by a worrying margin. True, the markets can ebb-and-flow rapidly and 2016 is looking like one of those years; yet, CSX investors were looking for something to chew on prior to Tuesday’s fourth-quarter earnings release. A tepid 0.2% move on Monday just wasn’t the answer for which they were hoping.
Wall Street had already downgraded expectations from a year prior based on the poor fundamentals affecting railroad stocks. The current earnings-per-share consensus estimate of 46 cents is three cents shy of Q4’s estimate during fiscal year 2014 — and broke a trend of steadily rising final quarter earnings.
Regardless of whether CSX provides a positive surprise or not, the main concern is if its ridiculously low price-earnings ratio indicates good value.
So far, most signs point to a resounding no.
Between 2012 and 2014,annual revenue growth shuddered to a halting 3%. This compares very unfavorably to the 10% rise in revenue in 2011. Also, because quarter-over-quarter sales performance was volatile for most of 2015, Q4 really has to blow past estimates — otherwise, it will be a rare downer for CSX.
The technical signs are even more ominous. Since nearly hitting $37 per share, CSX stock has dropped 36% in the markets. At its present situation, CSX is dangling dangerously outside of established support lines, almost as if it’s begging to fall to $20 or below.
Wall Street can say what it wants about a broad recovery — CSX and other railroad stocks are likely to fall further still before they climb out of their rut.
Railroad Stocks Under Duress: Genesee & Wyoming Inc (GWR)
Sometimes, smaller is better. Without the added pressure and overhead costs typical of industry leaders, the management teams of smaller companies can fully focus on the issues that matter.
Unfortunately, the fallout in railroad stocks has affected the full spectrum of competitors, including relative minnow Genesee & Wyoming Inc (GWR).
Carrying a market cap under $3 billion, the short line and regional freight specialist doesn’t generate nearly as much publicity as the major railroad stocks, except on the bad days. On a YTD basis, GWR is down nearly 11%, easily the worst performer on this list.
It’s not that GWR is a horrible investment. Indeed, the profit margins are very good compared to most other railroad stocks, and financially, there are multiple indications of stability — although its debt-levels may be a tad high for comfort. But from an investor’s perspective, will GWR provide the kind of crazy growth it once did a few years ago?
While annual sales are likely to rise around 20% above FY2014’s results based on analysts’ estimates, should revenue meet Wall Street estimates in FY2016, growth will be halved to around 10%.
Technically, there’s a lot of risk built into GWR stock. Keep in mind that this is a company that has lost almost 51% of value since the beginning of April. The 3% swing that materialized on Monday, while strong, is inside the total range of trading activity for the preceding Friday. While there’s multiple interpretations of this inside day phenomenon, it could be said that the bulls are pensive and are feeling out the markets for further confirmation.
Railroad stocks may very well see that 20% upshot, but common sense tells us that we should at least wait until the broader markets stabilize. GWR is a prime example of what can happen when you jump too hot, too fast.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
