3 Railroad Stocks to Watch From a Challenging Industry

Core Viewpoint - The Zacks Transportation - Rail industry is currently facing challenges such as inflation, high interest rates, and supply-chain disruptions, but companies like Union Pacific Corporation, Canadian Pacific Kansas City Limited, and Norfolk Southern Corporation are better positioned to navigate these issues, aided by declining fuel costs which support bottom-line growth [1][4]. Industry Description - The Zacks Transportation - Rail industry consists of railroad operators that transport various freight types across North America, focusing on logistics and supply-chain services. Revenue primarily comes from freight, with some companies also earning from rail-related services like repairs and land sales [2]. Factors Deciding the Industry's Outlook - Economic activities are improving post-pandemic, leading companies to return cash to shareholders through dividends and buybacks, indicating financial strength. For instance, CSX Corporation announced an 8.3% increase in its quarterly dividend [3]. - The decline in oil prices, which fell nearly 6% from the beginning of 2025, is beneficial for the industry as fuel costs are a significant expense for transportation companies [4]. Economic Uncertainty - Rising inflation has created market unease, with concerns that the Federal Reserve may delay rate cuts, potentially impacting economic health. This uncertainty, along with geopolitical tensions, poses risks for railroad stocks [5]. Zacks Industry Rank - The Zacks Railroad industry currently holds a Zacks Industry Rank of 148, placing it in the bottom 40% of over 250 Zacks industries, indicating bleak near-term prospects [6]. Earnings Estimates - Analysts have reduced their earnings estimates for the industry, with the consensus estimate declining by 6.2% over the past year [7]. Industry Performance - The Zacks Transportation - Rail industry has underperformed compared to the S&P 500 and the broader sector over the past year, declining by 10.5% while the S&P 500 increased by 12.5% [8][9]. Current Valuation - The industry is currently trading at a trailing 12-month price-to-book (P/B) ratio of 6.14X, compared to the S&P 500's 8.06X and the sector's 4.21X. Historically, the industry has traded between 5.72X and 10.92X over the past five years [11]. Stocks to Watch - Union Pacific Corporation (UNP) is well-positioned for growth, benefiting from stable e-commerce demand and cost-cutting efforts. The company has a strong track record of earnings surprises, beating estimates in three of the last four quarters with an average beat of 3.35% [12][13]. - Canadian Pacific Kansas City Limited (CP) has consistently paid dividends, enhancing investor confidence and showing a solid earnings surprise track record with an average of 1.76% over the past four quarters [15][18]. - Norfolk Southern Corporation (NSC) is supported by e-commerce demand and employs a Precision Scheduled Railroading plan to optimize costs and services. The company also has a commendable earnings surprise history, averaging a 2.94% beat [19][20].