Shares in Norfolk Southern Corporation (NSC) jumped 3.20% on Monday, Feb. 11, after the company briefed investors with details of its strategic plan that focuses on increased productivity, efficiency and revenue growth.
"Our strategic plan capitalizes on the strength of our exceptional franchise to lower costs, operate more efficiently and deliver stronger margins," said Chairman, President and CEO James A. Squires, per a press release on the Norfolk Southern website.
As part of the plan to become more efficient, Norfolk Southern intends to reduce its headcount by 3,000 employees and operate 500 fewer locomotives. The company expects full-year operating ratio improvement in 2019 of at least 100 basis points on its 2018 operating ratio of 65.4% and expects a full-year operating ratio of 60% by 2021. This metric shows a company's operating expenses as a percentage of revenue and is a closely watched gauge of railroad performance by analysts.
In other financial targets set through 2021, Norfolk Southern expects revenue to grow at a compound annual rate of 5%, planned capital expenditures between 16% and 18% of revenues, and a dividend payout ratio of 33%.
Leading names in the sector tracked higher in yesterday's trading session as investors eyed other railroad companies that may benefit from similar initiatives to increase productivity, efficiency and growth. Investors who want to add railroad stocks to their portfolio should take a further look at these three issues.
Norfolk Southern Corporation (NSC)
Founded in 1883, Norfolk Southern Corporation primarily operates rail transportation services in the Eastern United States. The Virginia-based company generates revenue hauling coal, container traffic, agriculture, chemicals and timber. Norfolk Southern's latest strategic plan shows its commitment to prudent financial management. Trading at $176.95 with a dividend yield of 2.01% and a market capitalization of $47.47 billion, the stock is up nearly 19% year to date (YTD), outperforming the railroad industry average return by 5% over the same period as of Feb. 12, 2019.
Norfolk Southern shares broke above an area of recent consolidation on above-average volume during Monday's trading session to sit just 5.6% below their 52-week high of $186.91. It may be prudent for investors to wait for a pullback to the initial breakout area at $171.50 before buying, as the relative strength index (RSI) currently shows overbought conditions above 70.0. Upward momentum suggests that the share price wants to test the 2018 September swing high in the short to medium term.
Union Pacific Corporation (UNP)
Union Pacific Corporation (UNP), with a market cap of $121.09 billion, is the largest public railroad in North America. The company, headquartered in Warren Buffett's home town of Omaha, Nebraska, created roughly $23 billion in revenue during 2018, transporting similar freight to Norfolk Southern. Union Pacific's operating ratio improved 1.1% to 61.6% in the fourth quarter on a year-over-year basis. Its earnings have exceeded analysts' expectations over the past four consecutive quarters. As of Feb. 12, 2019, Union Pacific pays a 2.18% dividend and has returned 18.90% YTD. The stock traded up 1.63% Monday.
After a tough fourth quarter that saw Union Pacific shares come off the rails by almost 15%, the price has recovered to trade within several points of its 52-week high – $165.63. A change in sentiment occurred on Jan. 8, when the railroad company announced that it had hired industry veteran Jim Vena as its chief operating officer – that day, the stock closed up over 8%. Like Norfolk Southern, Union Pacific stock appears overbought in the short term with the RSI nudging 70.0. Investors should look for entry points close to the $157.50 level, where the issue finds support from a horizontal line connecting previous price action.
CSX Corporation (CSX)
CSX Corporation (CSX) provides rail transportation services in the United States and Canada. The company chiefly transports coal products, chemicals, intermodal containers and automotive cargo. When reporting its fourth quarter earnings in mid-January, CSX said that it expects its 2019 operating ratio to "outperform" its target of 60% and set a capital spending goal of $1.6 billion to $1.7 billion for this year, per Reuters. Analysts have a 12-month price target on the stock at $75.81, which is 9.5% above Monday's closing price of $69.21. CSX stock rose 0.67% yesterday and is up 11.40% on the year as of Feb. 12, 2019. Investors also receive a 1.39% dividend.
The CSX share price has recouped over half of its fourth quarter loss since bottoming out on Dec. 26 at $58.47. Investors who wish to buy the stock should look for retracements to the $68 level, where the price encounters support from an uptrend line stretching back to late December and the 200-day simple moving average. Over the next month, traders should look for price to test the August and October swing highs that proved to set an intermediate double top.