(Bloomberg News circulated the following story by Angela Greiling Keane and Hugo Miller on August 12.)
NEW YORK — Shares of Union Pacific, Burlington Northern, and other railroads plunged Tuesday on concern that their valuations had peaked.
“The rail stocks have had huge relative outperformance,” said Randy Cousins, an analyst at BMO Capital Markets in Toronto. “What this looks like is people taking some of the win off the table.” He rates Union Pacific as “market perform.”
Tuesday’s 5 percent slide by the S&P 500 Railroads Index, consisting of Union Pacific and its three biggest U.S. peers, outstripped the S&P 500’s 1 percent drop. That reversed 2008’s pattern, with the rail index soaring 32 percent through yesterday while the broader benchmark slumped 11 percent.
Union Pacific dropped $3.11 to $76.14 on the New York Stock Exchange. Burlington Northern Santa Fe dropped $3.84 to $96.10. CSX Corp., the third-largest railroad, slipped $4.43, or 6.9 percent, to $60.01.
Union Pacific shares are the most-expensive of the large U.S. railroads based on its estimated 1-year price-earnings ratio of 16.85, followed by CSX at 16.07. Rising demand for U.S. commodity exports has helped railroads keep raising rates, easing the pain of a freight slump that began in 2006.
Tuesday’s drop signals “momentum-type investors” leaving the rail stocks, which may provide a buying opportunity for “people that believe in long-term stories,” said Jason Seidl, a New York-based analyst for Dahlman Rose & Co. LLC.
“With such a negative reaction today, this seems like people are moving out of a sector that has done well this year, especially on a relative basis,” he said in an interview.
Three of the four big U.S. railroads reported increases in second-quarter profit compared with a year earlier. Only No. 2 Burlington Northern said earnings fell, as it struggled with record diesel-fuel prices and flooding in the U.S. Midwest that slowed shipments.
“This is the best-performing sector this year,” said Morgan Keegan Inc. analyst Arthur Hatfield, based in Memphis, Tenn. “So any sort of pullback or momentum shift, you’re going to see bigger moves than the averages to the downside.”
Freight volumes on U.S. and Canadian railroads are 2.2 percent lower this year through Aug. 2, according to the Association of American Railroads, which releases the weekly data each Thursday. CSX, embroiled in a proxy fight all year, is down 2.7 percent, led by a drop in automotive shipments.