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A CSX freight train travels in Louisville, Kentucky.
Luke Sharrett/Bloomberg
Two railroad stocks caught upgrades Friday. Logistics stocks are heating up on Wall Street right now. That’s good news for the U.S. economic outlook.
Benchmark analyst Mark Levin upgraded shares of both CSX (ticker: CSX) and Norfolk Southern (NSC) to Buy from Hold and established respective price targets of $95 and $250 a share. That implies gains of almost 20% for Norfolk and 25% for CSX shareholders based on recent trading levels.
For both, Levin sees benefits from precision scheduled railroading, or PSR. That’s a term invented by the late Hunter Harrison and focuses on improving asset utilization by scheduling more point-to-point service, among many other things. Harrison ran several North American railroads over his illustrious career.
“Productivity should continue to improve with better volumes [and] PSR gains, leading to strong incremental margins [and] improved [free cash flow] conversion,” wrote Levin in his CSX upgrade note, while pointing out that Norfolk also will benefit from PSR.
Rail volumes tied to consumer spending are back above pre-pandemic levels, based on industry data from the Association of American Railroads. Rail volumes ties to the industrial economy aren’t back to prior peaks, but have shown steady improvement since May.
Railroads are, essentially, consumer/industrial hybrids, shipping all kinds of goods across the U.S. The stocks have behaved like it. Rail shares are up about 13% year to date on average. That’s better than the 7% drop of industrial components in the S&P 500, but not as good as the 18% gain of consumer discretionary components in the S&P 500.
Rails are good proxy on the overall U.S. economy. Wall Street, overall, isn’t quite as bullish as Levin. He rates four out of the six rails he covers Buy. Union Pacific (UNP) and Canadian Pacific Railway (CP) are the other two Buy-rated names. He rates Canadian National Railway (CNI) and Kansas City Southern (KSU) Hold. The average analyst Buy rating ratio for those six company is about 50%. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 58%.
The Street likes, not loves, railroads, but logistics companies are getting more interest from analysts as the economy improves. FedEx (FDX) stock has seen several upgrades since early July. United Parcel Service (UPS) was upgraded to Buy at Credit Suisse on September 21. XPO Logistics (XPO) was upgraded to Buy at KeyBanc in mid-August.
Another big investor has shown more interest in logistics lately. Blackstone (BX) is trying to buy Kansas City Southern for $208 a share, or $23 billion, including debt. That works out to about 25 times estimated 2021 earnings and 15 times estimated 2021 Ebitda, short for earnings before interest, taxes, depreciation, and amortization.
Railroad stocks, on average, trade for about 21 times estimated 2021 earnings. Norfolk and CSX have the lowest price-to-earnings ratios, both are below 20 times.
Write to Al Root at allen.root@dowjones.com