Shares of CSX Corp. and Norfolk Southern Corp. both sank toward the lowest levels in nearly two years Tuesday, after UBS analyst Thomas Wadewitz backed away from his long-time bullish stances on the railroad operators, citing a “deteriorating” economic outlook.
Meanwhile, the Dow Jones Transportation Average
rallied 1.4%, to reverse and earlier loss of as much as 0.4%, after closing Monday at a 22-month low; the Dow Jones Industrial Average
gave up 50 points, or 0.2%, and was headed toward the lowest close since November 2020.
UBS’s Wadewitz cut his rating on CSX to neutral after being at buy since May 2020, and downgraded Norfolk Southern to neutral after being at buy for at least the past three years.
Wadewitz said that with the macroeconomic backdrop “deteriorating,” he believes consensus 2023 earnings-per-share estimates are too high for the companies, as well as other U.S. rail companies. He also expects near-term estimates for industrial-related and intermodal volumes will have to come down.
“While a significant decline in freight demand would likely alleviate existing capacity constraints and lead to the improved service levels needed for the rails to regain share from truck, we believe it will be difficult for the U.S. rails to achieve the ~2.5% volume growth currently reflected in consensus [estimates],” Wadewitz wrote in a note to clients.
In addition to lower volumes, he believes labor inflation, and lower fuel and export coal pricing will act as earnings headwinds through 2023.
The concerns over labor inflation comes on the heels of a tentative deal reached in recent weeks between the rails and labor unions that averted a strike that could have crippled the industry. The deal included a 24% wage increase through 2024, including an immediate 14.1% increase.
Wadewitz said on the pricing side, CSX and Norfolk Southern face lower revenue per car in coal and a decline in the export benchmark price.
CSX shares have tumbled 27.6% year to date and Norfolk Southern’s has sunk 28.1%, while the Dow transports have shed 26.2% and the Dow industrials have declined 19.6%.