The Zacks Transportation - Railindustry faces challenges, ranging from tariff-induced economic uncertainties, inflationary pressures and resultant high interest rates to concerns pertaining to supply-chain disruptions.
Despite the challenges surrounding the industry,Union Pacific Corporation UNP, Canadian Pacific Kansas City Limited CP and Norfolk Southern Corporation NSC appear better placed to tide over the challenges. Declining fuel costs represent a tailwind as far as bottom-line growth is concerned.
Industry Description
The Zacks Transportation - Rail industry includes railroad operators transporting freight (such as agricultural products, industrial products, coal, intermodal, automotive, consumer products, metals and minerals), primarily across North America. These companies focus on providing logistics and supply-chain expertise services. While freight constitutes a significant chunk of revenues, some of these companies also derive a small portion of their top line from other rail-related services, including third-party railcar and locomotive repairs, routine land sales and container sales, among others. A few companies offer service to multiple production and distribution facilities. Besides locomotives, some of these companies own equipment of leased locomotives, railcars etc.
Factors Deciding the Industry's Outlook
Strong Financial Returns for Shareholders:With economic activities gaining pace from the pandemic lows, more and more companies are allocating their increasing cash pile through dividends and buybacks to pacify long-suffering shareholders. This underlines their financial strength and confidence in the business. Among the Transportation – Railroad industry players, CSX Corporation CSX announced an 8.3% increase in the quarterly dividend in February 2025.
Decline in Oil Priceis a Tailwind: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil prices declined almost 12% from the beginning of 2025 to date. As fuel expenses represent a key input cost for any transportation player, a fall in oil prices bodes well for the bottom-line growth of railroad stocks.
Economic Uncertainty Remains: The current administration is focused on protectionism, which restricts international trade to help domestic industries. Tariff tensions are heating up, with new tariffs levied by the U.S. federal government, which has impacted the United States’ biggest trading partners — Canada, Mexico, and China. With retaliatory tariffs against the United States, trade tensions are escalating. These tariff-induced economic uncertainties do not bode well for industry participants. With inflation remaining a concern, risks associated with an economic slowdown and geopolitical tensions dampen the prospects of stocks belonging to this industrial cohort. Sluggish economic growth and inflationary woes are likely to make markets more volatile in the coming days. Rising economic uncertainty does not bode well for industry players.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Transportation Railroad industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #36. This rank places it in the top 15% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that investors can consider, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500, Outperforms Sector
The Zacks Transportation - Rail industry has underperformed the Zacks S&P 500 Composite while outperforming the broader sector over the past year.
Over this period, the industry has declined 2.4% compared with the S&P 500 Index’s northward movement of 11.8%. The broader sector has declined by 9.4%.
One-Year Price Performance
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Industry's Current Valuation
Based on the trailing 12-month price-to-book (P/B), a commonly used multiple for valuing railroad stocks, the industry is currently trading at 5.97X compared with the S&P 500’s 7.99X. It is above the sector’s P/B ratio of 3.46X.
Over the past five years, the industry has traded as high as 10.92X, as low as 5.28X and at the median of 7.32X.
Price-to-Book Ratio (TTM)
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3 Stocks to Keep an Eye On
We are presenting three Zacks Rank #3 (Hold) stocks that are well-positioned to grow in the near term.
Union Pacific: Headquartered in Omaha, NE, Union Pacific, through its subsidiary, Union Pacific Railroad Company, operates in the railroad business in the United States.
Relatively stable ecommerce demand, cost-cutting efforts to boost the bottom line and consistent initiatives to reward its shareholders through dividend payments and share repurchases bode well for UNP’s prospects. Further, UNP has a stellar track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in two of the past four quarters (missed the mark in the remaining two quarters), with an average beat of 1.18%.
Price and Consensus: UNP
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Canadian Pacific: Headquartered in Calgary, Canada, Canadian Pacific manages a transcontinental freight railway in Canada, the United States and Mexico.
We are encouraged by the Canadian Pacific’s decision to pay dividends consistently. Such a move instills investors’ confidence and positively impacts the company’s bottom line. Canadian Pacific has an encouraging track record with respect to earnings surprise. The company's earnings surpassed the Zacks Consensus Estimate in two of the past four quarters (met the mark in one quarter and missed the mark in the remaining quarter), delivering an average surprise of 2.11%.
Price and Consensus: CP
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Norfolk Southern: Headquartered in Atlanta, GA, Norfolk Southern engages in the rail transportation of raw materials, intermediate products and finished goods in the United States.
Ecommerce demand is supporting Norfolk Southern’s shipment volumes. The company utilizes the Precision Scheduled Railroading operating plan to reduce costs and enhance services for optimal asset utilization. We are impressed by Norfolk Southern’s efforts to reward its shareholders through dividends and buybacks. Its strong free cash flow-generating ability supports its shareholder-friendly activities. NSC’s focus on improving service, safety, and productivity despite the challenges is commendable.
NSC has a solid track record with respect to earnings surprises. The company surpassed the Zacks Consensus Estimate in three of the past four quarters (missed the mark in the remaining quarter), with an average beat of 3.54%.
Price and Consensus: NSC
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Zacks' Research Chief Names "Stock Most Likely to Double"
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpUnion Pacific Corporation (UNP) : Free Stock Analysis Report
Norfolk Southern Corporation (NSC) : Free Stock Analysis Report
Canadian Pacific Kansas City Limited (CP) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
