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Zacks Industry Outlook Highlights: Canadian National Railway, Canadian Pacific Railway, Norfolk Southern, Union Pacific and Kansas City Southern

CHICAGO, Dec. 30, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the Railroads , including Canadian National Railway Company (NYSE:CNI-Free Report), Canadian Pacific Railway Ltd. (NYSE:CP-Free Report), Norfolk Southern Corp. (NYSE:NSC-Free Report), Union Pacific Corp. (NYSE:UNP-Free Report) and Kansas City Southern (NYSE:KSU-Free Report).

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Industry: Railroads

Link:http://www.zacks.com/commentary/30588/railroad-industry-stock-outlook---dec-2013

After enduring difficulties in 2013, the railroad industry's resilience seems to have finally paid off. The industry's optimal operational efficiency amid an economic downturn and uncertain market conditions has readied it for a healthier 2014.

Despite predictions of further headwinds in Coal -- one of the major product shipments of rail – the sector emerged strongly on infrastructural developments that supported natural gas and petrochemical product shipments.

Zacks Industry Rank

Within the Zacks Industry classification, railroads are broadly grouped in Transportation (one of 16 Zacks sectors).

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for the railroad industry is currently #24, implying that the outlook remains positive on this sector. This highlights an optimistic outlook on the industry as railroads are delivering margin growth with gradual recovery in Coal shipments. Further, the upsurge in petrochemical shipments has also uplifted the markets conditions of this industry leading to earnings improvement.  

Earnings Trend of the Sector

The broader Transportation sector, of which railroads are part, reflects a stable growth trend. All sector participants have reported third-quarter results, which have been fairly good in terms of both beat ratios (percentage of companies coming out with positive surprises) and growth.

The earnings and revenues "beat ratio" for the quarter was 63.6% for the transportation sector. Total earnings for the companies in this sector grew 13.2% year over year on 4.5% revenue growth. Both revenues and earnings showed significant improvement from second quarter growth of 8.3% and 2.2%, respectively.   

The Consensus earnings expectation is pegged at 16.7% for the fourth quarter of 2013. Overall, the sector is expected to register full-year growth of 15.8% in 2013 followed by an estimated 16.8% growth in the first quarter of 2014. In terms of revenue expectation, the sector is expected to register 4.4% growth in the fourth quarter, resulting in an annual growth rate of 3.5%. The sector is expected to register revenue growth of 4.6% in the first quarter of 2014.

For a detailed look at the earnings outlook for this sector and others, please read our weekly Earnings Trends reports.

Third Quarter 2013 Financial Results

Going by the quarterly performance of the class 1 freight railroad carriers, we see that most of the companies under Zacks coverage surpassed earnings estimates for the third quarter. These include Canadian National Railway Company (NYSE:CNI-Free Report), Canadian Pacific Railway Ltd. (NYSE:CP-Free Report), Norfolk Southern Corp. (NYSE:NSC-Free Report) and Union Pacific Corp. (NYSE:UNP-Free Report).  Only one carrier, Kansas CitySouthern (NYSE:KSU-Free Report), narrowly missed the Zacks Consensus Estimate. However, all these carriers have shown significant growth from the year-ago quarter based on volume expansion, strong pricing and cost control measures.

Further, we believe rising employee productivity, deployment of fuel-efficient locomotives and undertaking railroad safety measures were some of the key drivers of profitability for the railroads in adverse market conditions.

Upcoming Results

Growth estimates for railroads for the upcoming quarter suggest a strong momentum in earnings. For Canadian Pacific, earnings growth projection is 46.75% and earnings estimate is pegged at $1.88. Canadian National is expected to deliver earnings growth of 10.75%, resulting in earnings per share of 78 cents as per the Zacks Consensus Estimate.

U.S. carriers like Union Pacific, Norfolk Southern and Kansas City Southern also remain on the growth trajectory with growth estimates of 14.37%, 14.50% and 25.87%, respectively.  The Zacks Consensus Estimate for Union Pacific, Norfolk Southern and Kansas City Southern is pegged at $2.50, $1.49 and $1.15, respectively.  

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