Rising macroeconomic risks and cost concerns caused Susquehanna Financial Group analyst Bascome Majors to dim his outlook on rail stocks, including a downgrade for Union Pacific Corporation (NYSE:UNP).
In a note to clients on Wednesday, the analyst indicated that while he remains positive on a number of names, the overall rail industry is growing less attractive amid a confluence of pressures on top and bottom lines. Majors advised that the risk of further demand softening lingers as rising rates likely hit key rail markets like housing, construction, and autos. Costs are not expected to be rosy either, with Majors pointing to labor inflation and union negotiations as glaring risks.
“Simply put, lagging rail service levels and upstream/downstream supply chain disruptions continue to limit volumes vs. underlying demand in many of rail’s key markets, including intermodal, automotive, coal, and other industrial traffic,” he explained.
As such, price to earnings multiples were pulled in across the space, with Union Pacific (UNP) catching a downgrade to Neutral in the reshuffle. Canadian National Railway (CNI) maintained its Neutral rating as well, while CSX Corporation (CSX), Norfolk Southern (NSC) and Canadian Pacific (CP) were still viewed positively despite a tempered upside target.
Read more on recent rail traffic declines.