After outperforming the market for years, freight-rail stocks have hit a bump in the road. Norfolk Southern’s stock has fallen 10% this year, in contrast to S&P 500’s 15% increase. Union Pacific and Canadian National Railway have mostly remained flat, while Canadian Pacific Kansas City and CSX have seen around a 5% increase.
However, according to Evercore ISI analyst Jonathan Chappell, a catch-up may be at hand. Rail stock valuations have dropped below 17 times the predicted 2024 earnings. Although this is less than the S&P 500’s 19, Chappell deems that this compression overreaches the risk of further disappointments.
Norfolk Southern faced a setback following its East Palestine, Ohio derailment. The railroad’s East Ohio mainline won’t be fully reopened till mid-summer. As a result, volumes have plummeted, and costs have escalated. Chappell anticipates that the full-year forecast will reach $12.83 in earnings, which is 6% less than what was expected in 2022. Nevertheless, with Norfolk stock hovering around 16 times that of his projected $13.73 per share in 2024, he rates the shares as Outperform and has set a target price of $247 from $220. Chappell’s top pick isn’t just his; Wells Fargo analyst Allison Poliniak-Cusic has also raised her target to $250.
Although volumes at other rails have also been underwhelming, Chappell still holds Outperform ratings on those stocks. Based on increasing freight volumes, he believes that CSX can rise to $36 from $33. CP began integrating its Kansas City Southern acquisition in June quarter, and as analysts determine the extent of cost savings, Chappell speculates that the stock could increase to $84 from $78. Meanwhile, UP is making changes to boost service and volume. The appointment of a new CEO could also boost the stock from $202 to $228.
Upcoming Events
Week of June 26, 2023
Monday
Carnival (CCL) will be reporting its second-quarter fiscal 2023 results.
Tuesday
Wallgreens Boots Alliance (WBA) and Jefferies Financial Group (JEF) will be releasing their earnings.
Delta Air Lines (DAL) will be holding its 2023 Investor day.
Data Reports
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The Census Bureau will release the durable goods report for May. Economists are forecasting a decrease of 1%, with new orders for manufactured durable goods predicted to come in at $280 billion.
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In addition, the Bureau will also be reporting new-home sales data for May. The consensus estimate is for a seasonally adjusted annual rate of 659,000 new single-family homes sold, which is 24,000 less than in April. The median sales price for April was $420,800, which was a decline of 15.3% from the record high of nearly $500,000 in October.
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Micron Technology (MU) will be releasing its third-quarter fiscal 2023 results. The company is expected to report a loss of $1.58 per share on sales of $3.7 billion, compared to a profit of $2.59 per share on $8.6 billion of revenue the previous year. Despite this negative prediction, Micron’s stock has gone up by 31% this year due to hopes that demand has bottomed.
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Finally, General Mills (GIS) will be releasing its fourth-quarter fiscal 2023 results.
Weekly Economic Report: Stress Test Results, Earnings Calls, and BEA Reports
This week, the Federal Reserve released the results of its annual stress test of the nation’s largest lenders. The stress test sets the capital cushion that banks must maintain to withstand a series of market and economic shocks. Banks with $100 billion or more in assets are subject to the test, with larger banks required to participate annually and banks with $100 to $250 billion in assets required to participate every other year.
In other news, McCormick, Nike, and Paychex hosted conference calls to discuss earnings on Thursday. On Friday, Constellation Brands reported first-quarter fiscal-2024 earnings.
The Bureau of Economic Analysis also released its third and final estimate of gross-domestic-product growth for the first quarter. Expectations were for GDP to have increased at an annual rate of 1.4%, a tenth of a percentage point more than the BEA’s second estimate from late May.
On Friday, the BEA reported personal income and expenditures for May. The consensus call was for income to rise 0.4% month over month, matching the April data. Spending was seen increasing 0.3%, following a 0.8% gain in April. The Federal Reserve’s favored inflation gauge, the core personal-consumption expenditures price index, was expected to increase 4.7% year over year, unchanged from April.
Institute for Supply Management Releases June Chicago Business Barometer
The Institute for Supply Management has released the June Chicago Business Barometer. Economists predict a reading of 44.2, which is almost four points higher than May’s reading. However, the index has remained below the expansionary level of 50 for nine consecutive readings.
