Service crew

US Rail Earnings Snapshot: Watch for Service and Labor Issues

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JPMorgan has become cautious on US rail stocks ahead of the sector’s earnings season.

While analyst Brian Ossenbeck and his team believe the risk-reward profile appears to be balanced with the devaluation of stocks from trading at peak valuation during the EPS peak in late March, they warn that the market may not be pricing in the full impact of a potential freight slump and that consensus earnings estimates have actually risen since 1Q22. A recovery in intermodal volume in the second half of the year is considered unlikely with significant rail service issues in Los Angeles and Long Beach, declining truck loading rates and a continued shortage of rail staff availability.

“We are increasingly cautious about the ability of U.S. railroads to hire and retain enough workers as they are locked in a contentious union contract negotiation that could stretch into 4T22.”

The firm downgraded Union Pacific Corporation (NYSE: UNP) and Norfolk Southern (NSC) from neutral to overweight and removed NSC from the US analyst concentration list due to the threat of soft guidance and commentary. JPMorgan also advised investors to steer clear of CSX (CSX) in the near term as trading continues to deteriorate at what is called a startling rate despite strong hiring efforts.

CSX Corporation (CSX) is the leading hitter of the US railroad earnings season, with its report due July 20.

See Researching Alpha Quant Ratings in the Rail Industry.