Norfolk Southern upgraded as analysts chart US rail recovery
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Analysts at both Citi and Wells Fargo took a more optimistic view of rail operators on Monday, moving to a bullish stance on Norfolk Southern (NYSE:NSC) in particular.

Citi analyst Christian Wetherbee upgraded CSX Corp. (CSX), Union Pacific (UNP), and Norfolk Southern (NSC) to Buy from Neutral, alongside the same shift on Knight-Swift Transportation (KNX), as he expects an inflection in the US transports as sentiment and valuations remain depressed.

âOur call is predicated on unsustainably low spot rates in TL, which are currently below operating costs, driving capacity out of the market, which should couple with a degree of consumer demand normalization in 2H23/1H24,â Wetherbee told clients. âWith US rails more focused on volume growth, we think the group is more closely tied to changes in the truck market than previous cycles, thus our call to pull them forward into the early cycle trade. Ultimately, we see upside to valuation and stock prices as the 2024 recovery story builds.â

Among rails, Norfolk Southern (NSC) is seen as having the most upside given expected service improvement and a âsteadily diminishing overhangâ from the early 2023 derailment of a train in East Palestine, Ohio.

To be sure, Citi noted that rails remain behind FedEx, XPO Inc. (XPO), and the aforementioned Knight-Swift in terms of preference despite the new Buy ratings. Additionally, US railroad operators were cited as better picks than their Canadian counterparts given the valuation premium of Canadian operators are âlikely to narrow as near-term volume outperformance dissipates.â Canadian National Railway (CNI) was cut to Neutral.

Wells Fargo took a similarly upbeat view of Norfolk Southern (NSC), but highlighted specific regional trends.

âOur favorable view of intermodal bodes well for both Eastern rails, NSC and CSX,â Alison Poliniak-Cusic told clients on Monday. âThere is a case for the Eastern rails to receive a growth premium vs. other geographies, a significant change given the historical 2x discount.â

As such, she upgraded Norfolk Southern (NSC) to Overweight from Equal Weight and hiked her price target from $225 to $250. CSX (CSX), meanwhile, was started at a Hold-equivalent rating and assigned a $32 price target.

Marking another contrast to Citiâs analysis, Poliniak-Cusic highlighted Canadian Pacific Kansas City (CP) as a winner. She started coverage at a Buy-equivalent and set a $90 price target for the stock.

âWe believe CP is uniquely positioned for growth over the long term, with competitive access to key markets in both Canada and the U.S., including ports on both the east and west coast. Such access should drive durable above market growth,â she wrote. âAdding to its core strength is the pending combination with KSU, which will serve in our view to enhance CP's existing network, improve efficiencies further given the seamless network of the combination, and elevate growth opportunities across Canada, the U.S., and Mexico.â

Shares of Norfolk Southern (NSC) rose 2% before the bell after fielding upgrades at both banks.
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