3 Railroad Stocks to Watch From the Prospering Industry

The Zacks Transportation - Rail industry faces headwinds from tariffs, inflation, and supply-chain issues, but benefits from declining fuel costs. Despite underperforming the S&P 500 over the past year with a 2.4% decline, the industry has outperformed the broader transportation sector. Union Pacific (UNP), Canadian Pacific Kansas City (CP), and Norfolk Southern (NSC) are highlighted as companies well-positioned to navigate these challenges, with each demonstrating a track record of earnings surprises and shareholder returns.

Analysis

The Zacks Transportation - Rail industry is currently navigating a complex environment characterized by tariff-induced economic uncertainties, inflationary pressures, high interest rates, and supply-chain disruptions. Despite these headwinds, declining fuel costs, with oil prices down almost 12% from the beginning of 2025 to date, provide a significant tailwind for bottom-line growth. The industry, carrying a Zacks Industry Rank #36 (placing it in the top 15% of over 250 Zacks industries), paradoxically indicates "dull near-term prospects" according to Zacks' methodology. Over the past year, the industry has declined 2.4%, underperforming the S&P 500's 11.8% gain, though it outperformed the broader transportation sector's 9.4% decline. Valuation-wise, the industry trades at a trailing 12-month price-to-book (P/B) ratio of 5.97X, which is below the S&P 500's 7.99X and its own 5-year median of 7.32X, but above the sector's P/B of 3.46X. Amidst these conditions, specific operators like Union Pacific (UNP), Canadian Pacific Kansas City (CP), and Norfolk Southern (NSC) are highlighted as being better positioned. These companies benefit from factors such as stable e-commerce demand, cost-cutting initiatives, consistent shareholder returns (dividends and buybacks, exemplified by CSX's 8.3% dividend increase in February 2025), and operational efficiencies like Precision Scheduled Railroading. UNP, CP, and NSC have also demonstrated positive earnings surprise histories, with average beats of 1.18%, 2.11%, and 3.54% respectively over their past four quarters.

Key Decisions for Investors

• Investors should consider a selective approach, focusing on fundamentally strong railroad operators like UNP, CP, and NSC, which have demonstrated resilience and consistent shareholder returns despite broader industry challenges.
• Monitor macroeconomic indicators such as inflation, interest rate movements, and international trade policies, as these factors significantly impact the rail industry's operating environment and outlook.
• Evaluate the current industry valuation (P/B of 5.97X) relative to historical norms and the broader market, alongside individual company performance, recognizing that while the Zacks Industry Rank suggests dull near-term prospects, specific firms show potential.
• Factor in the positive impact of declining fuel costs on profitability but remain cognizant of ongoing supply chain issues and economic uncertainties that could temper growth.