Salient to Investors:

John Larkin at Stifel Nicolaus said:

  • Railroad stocks are overvalued at 10.9 times enterprise value to EBITD on a trailing 12-month basis versus an average of 9.4 since 1993. The biggest gains are behind them.
  • Their cyclical earnings power will diminish, especially in a mediocre economic environment, and has no buy recommendations on companies in the index.
  • The margin boost rail operators enjoyed from re-pricing their legacy contracts has run its course, making it more difficult to surprise investors, while coal volumes have been weak – hurting profitability in a permanent way.
  • In-line performance relative to the market since 2012 coincides with the decline in coal volumes.

The S&P Supercomposite Railroads Index has beaten the S&P 500 Index by 2.9 percent over the last 12 months after being ahead by almost 500 percent since 2000.

Robbert Van Batenburg at Newedge said:

  • The strength of rail stocks earlier in the economic recovery that began in mid-2009 relative to the broader market showed investors were betting on accelerating GDP, but with the Fed tapering being overweight the group is no longer as viable.
  • Rail stocks need better-than-forecast economic growth to resume their outperformance of  the market on a longer-term basis.
  • The economy won’t expand at a rate that causes the volume of cyclical shipments to rise much beyond the current level.
  • The decline in car purchases means slower earnings growth for railroads, which transport large volumes of them.
  • Any boost to stock performance from a pick-up in weather-related coal volumes will be temporary.
  • The slowing Chinese economy is a potentially serious problem because many commodity exports are transported by rail.
  • Approval of the Keystone XL pipeline would further diminish the volume of rail-shipped commodities and hurt rail companies’ performance.

Andrew Burkly at Oppenheimer said railroad stocks offer a domestic play on the US economy, though are not universally attractive.

Jeffrey Kleintop at LPL Financial is still positive on the group, particularly in the midst of this unusually harsh winter, as railroads could see a reversal of years of declining coal shipments as stockpiles are depleted and the price of natural gas rises amid colder-than-normal weather.

The median economist expects Q1 GDP to rise at an annual pace of 2.2 percent versus an annualized gain of 3.2 percent Q4 2013 and 4.1 percent in Q3 2013.

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