Rails Making A Comeback?

America’s largest railroad company, Union Pacific (UNP - Free Report) , beat earnings Thursday sending the stock surging over 4%. UNP announced Q1 EPS at $1.93 per share beating the $1.89 estimates and was up 15% from EPS reported for the same quarter in 2018. UNP followed suit of railroad earnings with both CSX Corporation (CSX - Free Report) and Kansas City Southern (KSU - Free Report) reporting a strong positive earnings surprise earlier this week.

Union Pacific announced it would temporarily halt its $550 million project in Brazos, Texas as well as close down two “hump yards” in order to focus on operational efficiencies. The Brazos project is the largest undertaking in the history of Union Pacific, which dates back to 1862.

The entire railroad industry is hitting all-time highs this week following strong earnings support. The question that we pose to ourselves as investors is, what is driving this and what implications does this have on the broader markets? Below is the 10-year performance chart of UNP, CSX, KSU

Railroads have been the backbone of the US economy since the industrial revolution in the 1800s. We rely on railways to get our bulk cargo from one side of the US to the other with ease. When the economy is doing well so are railroad companies. Strong economic performance means businesses require more goods to be transported, causing railroad earnings to have a direct positive correlation with the markets.

The main driver of this seems to be the growing margins that each one of these companies is achieving. The railways are becoming more efficient, having more cars per load and fewer delays. Also, fuel costs have fallen since their high in September, allowing these railroads to operate each trip at a lower cost.

Upcoming Railroad Earnings

Norfolk Southern (NSC - Free Report) : 4/24

Norfolk Southern connects 22 states in Eastern US, operating 19,420 miles of rails. NSC is expected to have earnings of $2.17 per share, which would represent over 12% growth from the same quarter last year. Norfolk has an estimated to have Q1 revenue of $2.8 billion, over 3% growth from 2018. NSC has beat estimates for 6 consecutive earnings reports prior to this one. NSC has delivered returns exceeding 33% to investors so far this year so a beat may already have been priced in with the railway earnings being so strong already this week. NSC – Zacks Rank #3 (Hold)   

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