Transportation

Credit Suisse Still Very Bullish on Rails Despite Oil Woes

Credit Suisse is maintaining a bullish case for rail transportation despite the 55% drop in crude oil prices since last July. Relative to industrials, the firm considers railroads a strong play from an investment strategy standpoint.

The brokerage firm expects that rails are poised to generate double-digit earnings growth over the next two to three years, even considering the slowdown in shale-oil related volumes. There was a positive secular backdrop prior to shale being “in vogue” that is still intact, which will support growth in excess of gross domestic product for the foreseeable future. The firm considers the rail business model to be extremely resilient.

The downside risk from a decline in oil transportation is considered limited. Credit Suisse found, after stress testing the numbers, that if total shale oil revenues declined by 75% year over year in 2015, the average negative impact to railroad stock prices at current levels would be a modest 6%.

Multiples for these rail companies remain above their historical averages. However, the firm considers them deserving of this premium for a few reasons:

  • The rails have just begun to earn their cost of capital.
  • Capital efficiency has improved over the past five years
  • Free cash flow is rising.

ALSO READ: Credit Suisse’s Top Airline Stocks for 2015

24/7 Wall St. includes the top picks from Credit Suisse in its report below and adds some color in the form of current prices, consensus price targets, market cap and the 52-week trading range.

CSX Corp. (NYSE: CSX) was rated as Outperform by Credit Suisse with a target price of $38, implying an upside of 10.5% from current prices. Shares of CSX were up 2% at $34.39 in the first half of the Thursday’s trading. The stock has a consensus analyst price target of $36.43 and a 52-week trading range of $25.84 to $37.99. CSX has a market cap around $34 billion.

Norfolk Southern Corp. (NYSE: NSC) was rated as Neutral and its price target was lowered to $108 from $114. The price target implies upside of 5.6%. Shares of Norfolk Southern were up 1% at $102.23. The consensus analyst price target is $118.83, and shares have traded in a 52-week trading range of $87.14 to $117.64. The market cap is about $32 billion.

Union Pacific Corp. (NYSE: UNP) was rated as Outperform and had its price target raised to $130 from $128. The price target implies upside of 16.9%. Shares of Union Pacific were flat at $111.22. The consensus price target is $127.96. The 52-week trading range is $83.28 to $123.61. The company has a market cap near $99 billion.

Kansas City Southern (NYSE: KSU) was rated as Outperform and had its price target lowered to $127 from $135. The price target implies upside of 15.7% from current prices. Shares of Kansas City Southern were down less than 1% at $109.77. The consensus price target is $125.63, and the 52-week trading range is $88.56 to $126.49. The market cap is $12 billion.

ALSO READ: 10 Dying and 10 Thriving U.S. Industries

Another rail company not mentioned in the Credit Suisse report but worth a look is Burlington Northern Santa Fe (BNSF), which is owned by Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A). It plies the rails along the northern tier, including some of the larger oil-producing states. It is one of the largest rail transporters of oil in the country.

100 Million Americans Are Missing This Crucial Retirement Tool

The thought of burdening your family with a financial disaster is most Americans’ nightmare. However, recent studies show that over 100 million Americans still don’t have proper life insurance in the event they pass away.

Life insurance can bring peace of mind – ensuring your loved ones are safeguarded against unforeseen expenses and debts. With premiums often lower than expected and a variety of plans tailored to different life stages and health conditions, securing a policy is more accessible than ever.

A quick, no-obligation quote can provide valuable insight into what’s available and what might best suit your family’s needs. Life insurance is a simple step you can take today to help secure peace of mind for your loved ones tomorrow.

Click here to learn how to get a quote in just a few minutes.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.