All Aboard! The Sell-Side Has Railroads In Reversal

Key Points

• Rail carriers like Norfolk and Southern are getting upgraded by analysts. 
• CSX is at an inflection point supported by intermodal business. 
• Union Pacific pays a healthy dividend and can be expected to grow the distribution. 

Growing trends within the railroad market have the stocks in reversal. The combination of institutional support and analysts’ upgrades have the stocks at a bottom and moving higher with an expectation for a recovery that could last beyond 2024. In Citigroup's NYSE: C eyes, the US transportation industry is at an inflation point that will lift truckers and rail carriers. That inflection is driven by a low-rate environment that is leading to a reduction in capacity. The capacity reduction and normalized consumer demand have the rails set up to rebound, given their current low valuations and a renewed focus on volume growth. 

Norfolk Southern Gets 2 Upgrades 

Citigroup and Wells Fargo NYSE: WFC upgraded Norfolk Southern NYSE: NSC to Buy and Overweight from Neutral equivalent ratings. These are the 3rd and 4th upgrades for the stock since the 1st of May; because of them, the stock is trending at #4 on Marketbeat.com's list of Most Upgraded Stocks for the last 30 days. This is telling because the stock is also listed as 1 of the Most Downgraded Stocks for the last 90 days, indicating a reversal in sentiment. As it is, the 24 analysts covering the stock have it pegged at Moderate Buy, and the sentiment is trending upward from Hold. Similarly, the consensus target is down compared to last month and last quarter, but the most recent is above consensus and indicates at least 10% of upside is available. 

The institutional activity is mixed quarter to quarter but bullish on balance for the last 12 months. The institutions own about 73% of NSC and CSX, and about 77% of UNP, so their activity is noteworthy. The institutions have been buying the others as well and have helped to put the bottom in the market. 

Wells Fargo Initiates CSX At Hold 

Wells Fargo sees a similar inflection for the rail carriers but added a twist to the call. In their eyes, intermodal should help drive results for the eastern carriers, so they added CSX NYSE: CSX. Wells initiated CSX at Hold with a price target slightly below the $34 consensus, and an upgrade from Citigroup compounds the news. Citi upgraded CSX to Buy from Hold along with NSC and UNP, setting a price target of $37 compared to the $34 consensus. The consensus target is steady and implies about 6% of the upside, although many of the newest targets are above the consensus. 

CSX stock received at least 13 updates following its Q1 earnings release. Those included 12 boosted price targets, 1 reiterated price target above the consensus, and all but 3 targets above the consensus. If this trend continues, the stock should easily reach the $34.75 consensus level and then continue higher to retest the highs set in 2022. 

United Pacific Corporation Is At Rock Bottom 

United Pacific Corporation NYSE: UNP share prices are at rock bottom after a year of downgrades, price target reductions, and institutional selling. The bottom is in because the analysts are upgrading the stock, and the institutions are buying again. The stock was upgraded to Buy from Hold at Citigroup with a price target of about 8% above the price action. The consensus target is firmer than last month and flat compared to last quarter, showing a bottom in sentiment. 

UNP, NSC, and CSX all pay reliable dividends. UNP and NSC pay 2.5% to 2.6% each, while CSX pays a lower 1.35% yield. The difference is that CSX pays less of earnings, so it has more capacity to increase the payout, and these stocks are increasing their distributions. UNP and CSC are on track to hit Dividend Aristocrat status in the next few years, while NSC has increased for 6 years.