(Reuters) - Volume woes at U.S. railroad operators are set to spill into next year as labor shortages continue to hurt the sector that is critical in connecting consumers with businesses and finished goods, according to analysts.
U.S. railroads have come under criticism from regulators and shippers for staffing cuts in pursuit of a leaner operating model that boosted profitability, but affected rail services.
"While the labor environment does appear to be incrementally improving over the last several months, it will still take some time to see meaningful service improvement," Wells Fargo (NYSE:WFC) said.
Railroad profits will be under further pressure from investments in service and U.S. union pay hikes through 2024, according to Susquehanna.
The North America railroad industry has also been under scrutiny for working conditions. The Biden administration last month secured a tentative deal between railroads and unions to avert a railway strike that could have wreaked havoc on the U.S. economy.
Graphic: Union Pacific , Canadian National, CSX (NASDAQ:CSX): Revenue in the past two quarters - https://graphics.reuters.com/USA-RAILWAYS/jnvweqmdavw/chart.png
THE CONTEXT
Railroads in North America have been accused of cutting staff to the bone to employ Precision Scheduled Railroading (PSR), a concept pioneered by former industry executive Hunter Harrison.
Service metrics further deteriorated during the pandemic, when railroads struggled to bring back workers they let go, at the same time dealing with an outbreak of COVID-19 among existing staff, prompting companies such as Union Pacific Corp (NYSE:UNP) to scale back some service temporarily.
Railroad operators have tried to increase staffing levels, partly under pressure from U.S. regulator Surface Transportation Board, but have found it tough to recruit amid labor shortages.
Graphic: Railroads stocks performance year-to-date - https://graphics.reuters.com/USA-RAILWAYS/RESULTS/movanxeanpa/Railroads%20YTD.png
THE FUNDAMENTALS
** Union Pacific is set to report third-quarter revenue of $6.41 billion on Oct. 20 and a profit of $3.06 per share, compared with a profit of $2.57 per share a year earlier, according to Refinitiv data.
** Canadian National Railway (TSX:CNR) Co is expected to report third-quarter revenue of C$4.31 billion ($3.13 billion) on Oct. 25 and a profit of C$1.99 per share, compared with a profit of C$2.37 per share a year earlier.
WALL STREET SENTIMENT
** The current average analyst rating on Union Pacific shares is "buy", with 15 analysts rating it "hold", and 16 "buy" or higher. Wall Street's current median 12-month price target is $229.
** The current average analyst rating on Canadian National shares is "hold", with 18 rating it "hold", and six "buy" or higher. Wall Street's current median 12-month price target is C$158.50.
($1 = 1.3763 Canadian dollars)