The Zacks Transportation - Rail industry faces challenges, ranging from 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 6% 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: A rise in inflation over the past couple of months has unsettled markets as investors worry that the Federal Reserve could delay its next rate cut till the second half of the year. This could have an adverse effect on the economy’s health. 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 railroad stocks.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Railroad industry, housed within the broader  Transportation sector, currently carries a Zacks Industry Rank #148. This rank places it in the bottom 40% of more than 250 Zacks industries.

The group’s  Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 6.2%.

Before we present a few stocks that investors can retain, given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Underperforms S&P 500 and Sector

The Zacks Transportation - Rail industry has underperformed the Zacks S&P 500 Composite index as well as the broader sector over the past year.

Over this period, the industry has declined 10.5% compared with the S&P 500 Index’s northward movement of 12.5% and the broader sector’s decline of 10%.

One-Year Price Performance

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 6.14X compared with the S&P 500’s 8.06X. It is above the sector’s P/B ratio of 4.21X.

Over the past five years, the industry has traded as high as 10.92X, as low as 5.72X and at the median of 7.38X.

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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 e-commerce 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 three of the past four quarters (missed the mark in the remaining quarter), with an average beat of 3.35%.

Price and Consensus: UNP

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 three of the past four quarters (missing the mark in the remaining quarter), delivering an average surprise of 1.76%.

Price and Consensus: CP

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.

E-commerce 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 2.94%.

Price and Consensus: NSC

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This article originally published on Zacks Investment Research (zacks.com).

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