Goldman Sachs Upgrades CSX, Downgrades Canadian National In Second Look At Rail Stocks

Goldman Sachs initiated coverage of rail stocks six months ago and revisited its thesis in a Monday report, including "admitting some wrongs."

The Analyst

Goldman Sachs' Matt Reustle upgraded CSX Corporation CSX from Sell to Neutral with a price target lifted from $52 to $60. The analyst downgraded Canadian National Railway CNI from Buy to Neutral with a price target lifted from $101 to $102.

CSX Upgraded

CSX stock has gained more than 25 percent since November, when Reustle initiated coverage of the stock with a bearish rating, the analyst said in the upgrade note. (See the analyst's track record here.) 

The stock's momentum can be attributed to management exceeding expectations in its cost-cutting initiatives coupled with an overall network improvement, Reustle said. Goldman Sachs now views CSX as more protected from rail service issues compared to its peers, while the stock's "significant" buyback program offers "defensive" elements to potential downside.

Operating leverage concerns across rail companies remain an ongoing concern, but CSX should be viewed as "largely insulated" given improvements in network velocity and dwell time since bottoming in the summer of 2017, the analyst said.

Goldman Sachs' new $60 price target is based on an increased NTM P/E target multiple of 18 (from 15.8x) on the basis of higher confidence in management's ability to achieve its 2020 operating ratio target of 60 percent with better-than-expected execution.

Related Link: CSX Sell-Side Bull, Bear React After Analyst Conference

CN Downgraded

CN stock hasn't gained ground since Goldman Sachs initiated coverage in November with a bullish stance, Reustle said. The initial Buy rating was based on expectations the company would show sequential improvement in margins through 2018 due to new capacity coming online, the analyst said. Yet it's now more likely that any network improvement will be "balanced" by higher capital expenditure levels and inflation dynamics, he said. 

CN's operational struggles are in fact "a good problem" resulting from surging demand that exceeds capacity, Reustle said. But this isn't reason enough for the stock to outperform, as CN hasn't shown enough evidence that it can improve operating metrics at a reasonable cost, he said. 

CN's commentary during the first-quarter conference call about "lessons learned" from service issues in 2017 and a need for excess network capacity is "an appropriate strategy" for the long term, the analyst said. At the same time, management's commentary adds uncertainty on the company's long-term operating ratio, which could be seen as an "overhang for the stock" in the medium term, Reustle said. 

Price Action

Shares of CSX were down 0.24 percent at the time of publication Monday, while CN was up 0.26 percent. 

Related Link:

BofA Downgrades Canadian National Railway After CEO Resignation