Railroad earnings season kicks off this week with Union Pacific and CSX reporting their results on Thursday, ahead of Norfolk Southern and Canadian Pacific Kansas City next week.
The results come at a time when derailments are firmly in the spotlight. On Feb. 3, a Norfolk Southern Corp. NSC, -0.37% train carrying hazardous materials derailed on the outskirts of East Palestine, Ohio, in what was described as a “PR nightmare” for the rail industry. Subsequent derailments of a Canadian Pacific Kansas City Ltd. CP, -1.32% CP, -1.76% train in North Dakota, a BNSF train in Minnesota and a freight train operated by Montana Rail Link in northwestern Montana have further highlighted the issue of rail safety.
Paid-sick-leave agreements with rail unions are also grabbing attention after the issue pushed the industry to the brink of a strike last year. Earlier this week, CSX Corp. CSX, -0.65% announced a paid-sick-time deal with two of its 12 unions, according to the Associated Press.
“Going forward, we’re closely watching if paid-sick-leave agreements can extend to all railroad unions, and the impact these agreements will have on attrition,” wrote Susquehanna Financial Group analyst Bascome Majors in a note released Wednesday. “We’re expecting an update on [first-quarter 2023] earnings calls starting with [Union Pacific] and CSX tomorrow.”
Union Pacific Corp. UNP, -0.51% reports its fiscal first-quarter results before market open Thursday. Analysts surveyed by FactSet expect the carrier to report earnings of $2.57 a share and sales of $6.022 billion.
“For Union Pacific, we think investors expect a miss, albeit a modest one in the [roughly] $2.50 range,” wrote Citi analyst Christian Wetherbee. “Within the quarterly details, we expect focus on the price/mix component of the revenue bridge.”
Union Pacific shares have fallen 2.7% in 2023, compared with the S&P 500’s SPX, 0.19% gain of 8.2%.
CSX reports its fiscal first-quarter results after market close Thursday. Analysts surveyed by FactSet are looking for earnings of 42 cents a share, or 43 cents on an adjusted basis, and sales of $3.579 billion.
“For CSX, the bar is likely higher, and we see the EPS bogey at 43 [cents] or better, supported by better service, mix and strong export coal yields,” wrote Citi’s Wetherbee.
Last week, Raymond James lowered its CSX price target to $34 from $36 and reiterated its outperform rating. In particular, Raymond James analyst Patrick Tyler Brown highlighted the company’s One CSX effort, which aims to optimize railroad assets, and improve cost controls. “CSX continues to execute its ONE CSX initiatives that we expect will continue to drive operational improvement, translating to stronger revenues, margin, EPS, and [free-cash-flow] gains in coming years,” he wrote. “While network congestion remains, we are encouraged by CSX’s commitment to adding key resources (T&E [Train and Engine] employees) to drive service levels higher.”
“We also remained intrigued by the possibilities with newly minted CEO [Joseph] Hinrichs and his incessant focus on customer service and the employee experience,” Tyler Brown added.
CSX shares have fallen 1.6% in 2023.
Norfolk Southern reports its fiscal first-quarter results before market open on April 26. Analysts surveyed by FactSet are looking for earnings of $3.09 a share, or $3.15 on an adjusted basis, and sales of $3.102 billion.
In a note released last week, JPMorgan analyst Brian Ossenbeck said there are two separate concerns for the company for the upcoming quarter. “First is that congestion has normalized faster than expected and while we don’t anticipate demurrage & accessorial fees will collapse in [the first quarter of 2023], this should be the first time we see how much of an effect they will have on intermodal revenue per unit,” he wrote.
Demurrage is a charge that compensates rail carriers for expenses incurred when rail cars are detained beyond a specified period of time for loading and unloading, according to the Surface Transportation Board. It also serves as a penalty for undue car detention. Accessorial charges include charges for diverting a shipment in transit and releasing a railcar with incomplete or incorrect shipping instructions.
The second concern for Norfolk Southern is the impact of the East Palestine derailment, according to JPMorgan. “The East Palestine derailment overhang is not at a point where it will start to fade in our view,” Ossenbeck said in the note. “Management will provide an update on the anticipated cost but will likely need to provide another one in the future as the damages are still accumulating, and it is unclear what is actually insurable and what is not at this stage.”
He added: “As such, we don’t see this update clearing the deck especially with the [National Transportation Safety Board’s] two investigations still underway.” JPMorgan has a neutral rating for Norfolk Southern.
Norfolk Southern’s stock has fallen 16.6% since the Feb. 3 derailment near the Ohio-Pennsylvania border.
Of 28 analysts surveyed by FactSet, nine have a buy rating, 18 have a hold rating and one has an underweight rating for Norfolk Southern.
Canadian Pacific reports its fiscal first-quarter results after market close on April 26. Analysts surveyed by FactSet are looking for earnings of 67 cents a share, or 68 cents a share on an adjusted basis, and sales of $1.714 billion.
This week, BMO resumed coverage of the rail carrier at outperform, pointing to Canadian Pacific Railway Ltd.’s merger with Kansas City Southern, which was completed on April 14. “We believe the combination of CP and KCS networks significantly expands the addressable freight market for the merged entity and catalyzes a period of strong organic volume growth that we expect will extend well into the coming decade,” wrote BMO analyst Fadi Chamoun.