The iShares Transportation ETF (
) has traded with a poor tone in recent sessions, and the price
action is catching attention. IYT extended over its May
high on July 18
, but the rally has not been sustained. Many in the trade
see the transport sector as an indicator of not only the
economy's health, but the condition of the overall equity
The potential breakdown in the transport sector prompted an
examination of the rail sector, as Union Pacific (
), Kansas City Southern (
), and Norfolk Southern (
) are three of the six largest holdings of the IYT ETF with an
approximate weighting of 27.5%. The table following displays a
sampling of rail names with a focus on Q2 results relative to
expectations and the movement in earnings per share estimates
over the past 7 days.
Q2 earnings results varied:
The results for the industry were mixed in Q2. CSX (
) posted the strongest positive EPS surprise, while Canadian
) recorded the largest negative earnings surprise. Genesee
and Wyoming (
) reports earnings on August 1
. Three companies beat forecast, while two fell short not
providing great bullish momentum for the sector.
Analyst reactions to the results and economic trends have been
uneven, and this may have taken some wind out of the transport
sector. As the table displays, three 2103 EPS estimates
have been raised for CSX over the past seven days, but 2014 EPS
estimate revisions have been mixed with one up and one
down. UNP saw six estimate revisions upward and five
estimate revisions downward for 2013, but a stronger seven up to
one down ratio for 2014. KSU has posited positive looking
agreement with five estimates up and two estimates down for 2013
and four estimates up and two estimates down for 2014. It is
difficult to read much form CP, GWR, and NSC where estimate
changes have been limited.
Valuation close to average:
The valuation of the sector is unexciting with the forward PE
ratio of CSX and NSC trading at a slight discount to the 10 year
median, but UNP, KSU, and CP trading at a premium to their 10
The PEG Ratio, the PE ratio relative to earnings per share
growth, shows CP as the most attractive. It is trading at a
discount to growth and low relative to its history. CSX and KSU
are trading at a discount, while GWR and UNP are at a premium to
the longer term median range.
Looking at cash flow, it is more difficult to draw a
conclusion. The table indicates that CSX, UNP, and NSC have
strong enough and consistent enough free cash flow to generate a
price to free cash flow ratio. This may be a sign of
financial stability, but expansion and future growth
opportunities may distort the usefulness of the metric.
Sales growth varies by operator:
The sector faces modest sales growth into 2014 with KSU, GWR,
and UNP projected to have the strongest growth rates. NSC
and CSX have the highest dividend yields and a payout which is
competitive with the 10 year treasury. The companies are
expected to produce earnings per share growth which is strong
compared to sales growth in most cases. The market is
probably more focused on earnings than sales for the sector.
Fundamental trends lack a major bullish catalyst - at
The backdrop for the industry is constructive, but lacks great
excitement. There are some themes running through the
1) Weak grain shipments have been a drag on the industry, but
KSU expected improvement in Q4 2013 due larger crops and harvest.
On a more positive note for KSU, there is a build out of capacity
to handle the shipment of oil from the Bakken and Canada to
facilities in Texas.
2) In its press release, UNP's CEO made the following
statement: "As we move into the second half of the year, the
economic outlook remains uncertain, but we're hopeful that we'll
see some economic improvement in the months ahead… ". The
comments suggest economic conditions are a headwind to vibrant
3) UNP noted weak international Intermodal volumes in Q2, but
was positive on autos, chemicals, shale production, and housing
in the second half. Housing seems less constructive given
recent price action in home building stocks. International
intermodal was expected to improve, but the peak season was
expected to be muted. UNP expected continued success in
converting highway business for Domestic Intermodal.
4) On coal, NSC saw continued sluggish demand in Europe for
export met, metallurgical, coal demand and slowing shipments into
Asia. Shipments to Asia were also hurt by a weaker
Australian dollar and lower benchmark met coal price settlements.
The thermal coal export market was being adversely impacted
by the weak API 2 index in Northern Europe. NSC saw
headwinds to export volumes through the rest of the year with
softer third and fourth quarters than the first half of 2013.
5) CSX indicated that the outlook for Q3 was favorable for 72%
of its volume with support from the oil and gas markets, light
vehicle production, Ag and fertilizer traffic, and waste and
equipment markets. 17% of volume was expected to be
negative with coal, both domestic and export, contracting.
6) In the week ending July 20
, the U.S. rail traffic was down 0.3% y/y with total carloads off
3.0% and intermodal up 2.8%. Petroleum and products were
the main driver of growth rising 28.0% y/y. Motor vehicle and
coal were down 7.6% y/y and 8.2% y/y respectively providing
7) CP maintained its outlook for 40% earnings per share growth
and projected revenues up in the high single digits. It also
seems focused on cost reduction.
All the names examined are Zacks Rank #3
(Hold). Sifting through the stocks, CSX may be
attractive for value focused investors given its PEG ratio, price
to cash flow, and dividend yield. Its slow relative sales growth
for 2013 explains the discounted valuation. Those
looking for stronger sales growth and the chance to exploit the
shipment of oil by rail may like KSU. Although the PEG ratio is
at a discount to its median, the forward PE ratio is pricing a
healthy growth outlook and the PEG ratio is above 1.0. CP
may be the surprise given its low PEG ratio and expectations for
solid earnings growth in 2013 and 2014.
CDN PAC RLWY (CP): Free Stock Analysis Report
CSX CORP (CSX): Free Stock Analysis Report
GENESEE & WYO (GWR): Free Stock Analysis
ISHARS-TRAN AVG (IYT): ETF Research Reports
KANSAS CITY SOU (KSU): Free Stock Analysis
NORFOLK SOUTHRN (NSC): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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