Stocks in the railroad space are being aided by momentum in the U.S. economy, with more goods being transported across the country.
The market is expected to continue its winning streak, banking on a rise in wages and more confident consumers. Moreover, the new tax law (Tax Cuts and Jobs Act) should boost profits further and drive stock prices of the participants of this key sector higher.
The robust financial health of railroads is reflective of the improved scenario for its players. The rebound has been aided by the much-improved scenario pertaining to the intermodal unit, a key revenue generating sector for railroads.
The sector has bounced back after a disappointing 2016. Intermodal revenues are likely to grow this year as well. In fact, intermodal shipments are expected to expand 4.2% in 2018, strengthening the top line for railroads in turn. Improvement pertaining to another key metric — operating ratio (operating expenses as a percentage of revenues) — is another positive for railroads.
In view of the above tailwinds, the fourth-quarter earnings season had been a good one for railroad stocks. Notwithstanding a few headwinds including some lingering impacts of devastating hurricanes, railroad companies continued the earnings momentum in the December quarter. We note that a number of companies in the space — including prominent names such as Norfolk Southern Corp. (NSC), CSX Corp. (CSX), Kansas City Southern (KSU) and Genesee & Wyoming, Inc. (GWR) — delivered an earnings beat in the quarter.
Volume Growth Likely to Drive Railroads in Q1
The stocks are likely to perform impressively in the first quarter of 2018 driven by volume growth. For example, the Zacks Rank #3 (Hold) railroad — Union Pacific Corp. (UNP) — expects volume growth in the soon-to-be-reported quarter to increase in the low single-digit range. Strong performance at the intermodal unit is expected to aid results. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.