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What Railroads Are Saying About the Economy in 2023

A CSX train in La Grange, Kentucky, on Jan. 13.

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Luke Sharrett/Bloomberg

Freight rail stocks seemed a potentially safe place for investors who wanted to avoid trouble from the economy’s slowdown. Those hopes were derailed this week as railroads reported pinched earnings and worrisome outlooks.

While the
S&P 500
index rose about 2.5% in the past five days, rail stocks fell by 3% to 6% as their December quarter results missed expectations. “It really didn’t matter this week at all,” wrote Evercore’s Jonathan Chappell in a Friday note. “If you were a rail that reported 4Q results this week, your stock was sold, aggressively.”

Union Pacific
(ticker: UNP) said that price increases helped December quarter revenue rise 8% to $6.2 billion. But higher costs produced a 4% drop in net income, even though a lower share count allowed earnings per share to edge up 0.2% to $2.67. That EPS number missed Wall Street’s consensus forecast of $2.79.

Union Pacific executives blamed weak growth in the volume of goods shipped on the economy and harsh weather, telling conference-call listeners that the railroad believes it can increase 2023 revenue by raising prices. But Credit Suisse’s Ariel Rosa, a Union Pacific admirer with an Outperform recommendation, wrote that investors find the company’s guidance frustratingly vague and unconvincing. The railroads can’t control shipping volumes and Union Pacific acknowledged weakness in consumer demand and industrial production.

Norfolk Southern
(NSC) and
(CSX) reported on Wednesday. Norfolk Southern’s December quarter revenue of $3.2 billion and earnings of $3.42 a share were in line with expectations, but the company warned that revenue in 2023 could be flat and that earnings growth will be “difficult.”

A down-earnings year in 2023 would be a rare event in rail history, wrote
Morgan Stanley
analyst Ravi Shanker in a Thursday note. Railroads have only had three down years in the last two decades, he noted, and none since the industry embraced the cost-efficiency strategies known as “precision scheduled railroading.” He fears 2023 will bring disappointment.

CSX had the strongest results of the bunch, with December quarter revenue rising 9% to $3.3 billion, and earnings of 49 cents a share topping forecasts for 47 cents. Management was also the most optimistic, predicting that revenue will grow faster than the overall economy this year.

But Morgan Stanley’s Shanker is dubious that CSX can avoid an earnings drop in 2023. He rates both CSX and NSC at Underweight, saying that at 17-times the forecast for 2023 per-share earnings, the stocks haven’t fully priced in the fact that the industry has already cut costs as much as can be expected from precision railroading. Any growth ambitions at railroads will face trouble in the form of rising costs and competition from trucking.

“The real question in our mind is whether the 2023 level of earnings is a
cyclical low or the new normal,” Shanker wrote. “We think the latter.”

Write to Bill Alpert at


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