Here's What You Can Expect From Big Railroads In Q3 Earnings

Things have looked up for the railroad space so far this year after not-so-favorable past few years (particularly 2015 and 2016) owing to weakness in domestic coal shipments. The improvement in the coal scenario has turned out to be a huge blessing for railroads as it is a key revenue generating commodity for the sector participants.

The election of Donald Trump as the President of United States last year also worked wonders for the coal industry. The President is in favor of reviving the industry by relaxing regulations detrimental to its prospects. He has started to act on his promises made during the campaigning phase. For example, he has taken measures to repeal the Climate Power Plan.

The rise in natural gas prices is also helping to revive the demand for coal. Moreover, according to the U.S. Energy Information Administration (EIA), coal production in the United States will improve in 2017 and 2018. Given the importance of coal to railroads, any positive development for the commodity implies good news for the sector. Improvement in the freight scenario is also a positive for railroads.

The revival of coal is evident from the impressive performances of key sector participants like Union Pacific Corporation (NYSE:UNP) , CSX Corporation (NASDAQ:CSX) and Norfolk Southern Corporation (NYSE:NSC) that registered double-digit growth with respect to coal revenues in the second quarter of 2017. In addition, an improving economy has also proved to be a boon for railroads as it implies that more goods are being transported across the United States via rail.

The shareholder-friendly activities of the likes of Norfolk Southern and Canadian National Railway Company (NYSE:CNI) in 2017 also highlight the financial prosperity of the sector participants.

Rail Traffic Data Highlights Improvement

The latest U.S. rail traffic report (for the week ended Sep 30, 2017) of the Association of American Railroads (“AAR”) reveals 1.9% year-over-year growth in rail traffic (sum of total carloads and intermodal units). While total carloads for the week declined 1.6%, intermodal volume increased 5.5% year over year. The favorable intermodal scenario is also a positive development for railroads.

The year-to-date data unveiled by AAR is also encouraging with a 3.8% improvement in total carloads. The favorable coal scenario is underscored by the fact that coal volumes have registered double-digit (12.3%) percentage gains so far this year. Overall rail traffic is up 3.6% year to date, with intermodal traffic rising 3.5%.

Headwinds That May Mar Q3 Earnings Picture

In view of the coal-related improvement, the bullish scenario related to the intermodal unit and the thriving domestic economy, results of companies in the railroads space are expected to impress in the third quarter of 2017. However, there are a few factors, which might dampen their third-quarter performance.

The back-to-back hurricanes (Harvey and Irma) have hurt operations of railroads by damaging important rail lines. Freight costs have skyrocketed following the natural disasters. With fuel costs on the rise, the bottom line of these companies are likely to be hurt in the third quarter due to higher costs as a result of the hurricanes.

Union Pacific expects Harvey to hurt its bottom line to the tune of approximately 5 cents per share in the third quarter.

The sluggishness of the automotive unit is also a cause of worry for railroads. With the automotive sector accounting for a significant chunk of their revenues, softness in automotive volumes is also likely to hurt railroads in the third quarter.

What Awaits These 6 Railroads in Q3?

Given this backdrop, let’s take a look at how key railroad operators might fare in the third quarter of 2017. According to our quantitative model, a company needs the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase the odds of an earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Kansas City Southern (NYSE:KSU) , based in Kansas City, MO, is unlikely to report better-than-expected earnings per share in the third quarter despite its Zacks Rank #3 (Hold). This is because it has an Earnings ESP of -1.18% as the Most Accurate estimate of $1.33 per share is a penny below the Zacks Consensus Estimate. Its results are likely to be hurt by Harvey. In a filing with the U.S. Securities and Exchange Commission, last month, Kansas City Southern provided a detailed account of its operations being hurt by Harvey. Its results are scheduled to be announced on Oct 20.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Genesee & Wyoming (NYSE:GWR) , based in Darien, CT, is also unlikely to report better-than-expected earnings per share in the third quarter. This is because it carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -1.15% with the Most Accurate estimate of 83 cents per share is pegged a penny below the Zacks Consensus Estimate. In fact, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement, especially when it is witnessing negative estimate revisions. High costs are expected to limit the company's bottom-line growth in the quarter. Results are scheduled to be announced on Oct 31.

Norfolk Southern Corporation, based in Norfolk, VA, is likely to report better-than-expected earnings per share in the third quarter. This is because it carries a Zacks Rank #3 and has an Earnings ESP of +1.36% as the Most Accurate estimate of $1.66 per share is pegged 2 cents above the Zacks Consensus Estimate. The company will report results on Oct 25, which are expected to benefit from higher coal volumes.

Union Pacific Corporation, based in Omaha, NE, is likely to report better-than-expected earnings per share in the third quarter. This is because it carries a Zacks Rank #3 and has an Earnings ESP of +0.07%. Its results, scheduled to be disclosed on Oct 26, are expected to be buoyed by higher freight revenues.

Canadian National Railway Company, based in Calgary, Canada,is unlikely to report better-than-expected earnings per share in the third quarter despite its Zacks Rank #3. This is because it has an Earnings ESP of -0.32%. Its results, scheduled to be reported on Oct 24, are expected to be hurt by lower revenues.