Citi Bullish On Rail Stocks, Upgrades Norfolk Southern

U.S. railroad industry is booming and one Wall Street analyst says it’s full steam ahead for Norfolk Southern Corp. NSC.

The Analyst

Citi analyst Christian Wetherbee upgraded Norfolk Southern from Neutral to Buy and has raised his price target from $161 to $176.

Weatherbee also reiterated ratings on the following five railroad stocks:

• Canadian National Railway (USA) CNI, Neutral rating, $85 target.
• Canadian Pacific Railway Limited (USA) CP, Buy rating, $215 target.
• CSX Corporation CSX, Buy rating, price target raised from $67 to $75.
• Kansas City Southern KSU, Buy rating, $123 target.
• Union Pacific Corporation UNP, Buy rating, $170 target.

The Thesis

Norfolk Southern has a good chance to exceed consensus earnings expectations, and earnings multiples are already expanding in the group.

“We acknowledge NS’s service issues, which have kept us on the sidelines previously, but volume and pricing trends have been better than expected and we want to take advantage of the modest pause in shares recently to get more constructive,” Wetherbee said in the note.

He said Q2 volumes have been better than expected, and Citi has raised 2018 and 2019 EPS projections for railroad stocks as a group. Following the recent tax reform, Wetherbee said U.S. rail stocks have a chance to produce meaningful free-cash-flow growth. If capex remains elevated over time, Wetherbee said earnings multiples will likely expand accordingly.

CSX is Citi’s top stock pick in the space, but rail stocks are a “must-own” sub-sector of the market for the time being.

Price Action

Norfolk Southern stock traded lower by less than 1 percent to $151.50.

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