(The Associated Press circulated the following on January 28.)
NEW YORK — Strong earnings reports from railroads have driven up the sector’s stocks in recent weeks, but analysts urge investors to stay patient, saying future hurdles may beat down stocks and provide a better buying opportunity.
Bear Stearns analyst Edward Wolfe said that although investors have high expectations for the railroads this year after a strong finish to 2007, the stocks may continue to slip amid continuing weak demand and overall economic worries, along with harsh winter weather and increased regulatory attention.
Wolfe said investors should ‘aggressively’ buy railroad stocks after they fall to slightly lower levels this year. He noted the railroads were able to grow earnings in 2007 as strong pricing and operational improvements offset the impact of declining volumes.
‘We expect volumes to remain weak entering the year with pricing decelerating, capital spending to remain high, and the regulatory environment to be somewhat treacherous.’ he said.
Regulatory issues weighing on the rails include the Rail Safety Improvement Act that Wolfe predicts will be signed into law this year. If passed, the act would likely mandate more training and reduced service hours of service for conductors and engineers, which could increase costs and weigh down results. A competition and regulation bill could also lead to changes in the railroad’s pricing structure.
‘A change in the regulatory environment can quickly take the punch bowl away,’ he said.
Over the next decade though, the analyst said that railroads should take business from truckers as customers turn to the tracks because of high fuel costs and increasing highway congestion.
‘We urge long-term investors to act swiftly in buying the rails when these opportunities present themselves, even though the stocks may make them feel a bit squeamish,’ he said.
Rails should also maintain better pricing power than their trucking counterparts, he said, which should ‘ensure solid earnings per share growth regardless of the economy.’
Norfolk Southern is currently the only rail that Wolfe expects to outperform the S&P 500 in the near future, but he noted that all the rails will be ‘compelling’ investments after short-term worries have subsided.
Wolfe predicts Union Pacific Corp., the largest North American rail by revenue, and eastern rail CSX Corp. should reap the most benefits from improvements in productivity and pricing in 2008 because they have the led the group in year-to-date comparisons.
Overall, he expects that transportation stocks will outperform the market as volumes begin to improve.
‘We expect demand to improve by year-end as freight leads the economy back to health,’ he said.