U.S. rails earnings preview: Watch for service and labor issues to be drag
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JPMorgan turned cautious on U.S. rails stocks ahead of the earnings season for the sector.
While analyst Brian Ossenbeck and team think the risk-reward profile appears to be balanced with the stocks de-rating since trading at peak valuation on peak EPS at the end of March, they warn that the market may not be pricing in the full impact of a potential freight recession and that consensus earnings estimates actually went up since 1Q22. A second half intermodal volume recovery is seen as unlikely with material rail service issues at Los Angeles and Long Beach, falling truckload rates, and persistent shortage of rail crew availability all in play.
"We are increasingly cautious on the U.S. railsâ ability to hire and retain sufficient labor while they are locked in a contentious union contract negotiation that could stretch into 4Q22."
The firm downgraded Union Pacific Corporation (NYSE:UNP) and Norfolk Southern (NSC) to Neutral from Overweight and removed NSC from the U.S. Analyst Focus List due to the threat of soft guidance and commentary. JPMorgan also advised that investors avoid CSX (CSX) in the near term as operations continue deteriorating at what is called a surprising pace despite significant hiring efforts.
CSX Corporation (CSX) is the leadoff hitter for the U.S. rails sector earnings season, with its report due out on July 20.
See Seeking Alpha Quant Ratings across the rails sector.