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Railroad Stocks: Analysts Don’t See Much Upside Potential

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Analysts’ opinion

The analysts polled by Reuters have provided a bullish recommendation for most of the Class I railroad companies. However, analysts’ target prices on these stocks show minimal upside potential in a year.

Approximately 54% of the 26 analysts covering Norfolk Southern (NSC) recommended a “strong buy” or “buy,” 38% recommended a “hold,” and 8% recommended a “sell.” Analysts’ target price of $214.52 on the stock represents a potential 5.4% rise from the current price of $203.52.

Kansas City Southern (KSU) has received “strong buy” or “buy” recommendations from 63% of the 19 analysts, while 37% recommended a “hold.” Analysts’ average target price of $133.59 on the stock represents a potential 9.5% rise from its current price of $121.95.

About 61% of the 28 analysts tracking Union Pacific (UNP) recommended a “strong buy” or “buy,” ~36% recommended a “hold,” and 3% recommended a “sell.” The average target price of $185.64 represents a potential 6.3% rise from the current price of $174.62.

CSX (CSX) got “strong buy” or “buy” recommendations from 46% of the 26 analysts covering the stock. Approximately 50% of the analysts recommended a “hold,” while 4% recommended a “sell.” Analysts’ average target price of $81.88 represents a potential 4.4% rise from its current price of $78.40.

Why limited upside potential?

Analysts’ lower target prices could be due to an already massive upswing in railroad stocks in 2019. YTD (year-to-date), Norfolk Southern, Kansas City Southern, Union Pacific, and CSX stocks have gained 36.1%, 27.8%, 26.3%, and 26.2%, respectively.

Their returns have also outpaced the gains of iShares Transportation Average ETF (IYT), which invests in the US transportation stocks available in the Dow Jones Industrial Average and broader market indexes. IYT has risen 14.6%, while the Dow Jones and the S&P 500 indexes have gained 10.4% and 14.1%, respectively.

Due to the massive share price gain YTD, these stocks have become relatively overvalued compared to the transportation industry’s average. The industry’s PE ratio is 16.8x, while Norfolk Southern, Kansas City Southern, Union Pacific, and CSX have PE ratios of 20.1x, 21.9x, 21.4x, and 19.2x, respectively.

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