Stifel Rides The Rails, Initiates Seven Stocks

Stifel analyst Michael Baudendistel went all-in on rail stocks Wednesday, reinstating coverage on seven of the biggest names in the railroad industry. Baudendistel is generally bullish on the group, but his analysis suggests some stocks are better bets than others.

Here’s a rundown of what he had to say about each name. (See Baudendistel's track record here.)

Kansas City Southern KSU: Buy rating, $130 target. The company’s volume growth has historically allowed the stock to trade at a valuation premium to its peer group, Baudendistel said. “We have long believed KSU to be the Class I rail with the most revenue growth opportunities given its unique positioning in Mexico and at the border, volume growth potential associated with a growing Mexican economy, growth in Mexican manufacturing, the potential for Mexican energy reform and investments made in the Gulf Coast chemicals region."
CSX Corporation CSX: Buy rating, $73 target. Baudendistel said CXS has has trouble executing its margin expansion plans during its CEO transition. “However, of late, it is clear to us that service levels have improved and 1Q18 results demonstrate that the actions of the last year-and-a-half needed to be done, as the company posted a 570-basis point improvement in operating ratio."
Genesee & Wyoming Inc GWR: Buy rating, $90 target. Baudendistel said the company has plenty of growth opportunities both in North America and abroad, but is focusing primarily on North America in the immediate future. “While global market conditions can lead to volume volatility as experienced during the 2015 commodity recession, the company still boasts commodity, customer and geographic diversification that are unparalleled in the railroad industry."
Canadian National Railway (USA) CNI: Hold rating, $84 target. Canadian National has had a rough few months, as it lost market share, replaced its CEO, dealt with a harsh winter and cut its guidance in the first quarter. “We believe those challenges are well-known to investors, and going forward, we believe the company knows what needs to be done to get service levels back to where they need to be,” Baudendistel said.
Norfolk Southern Corp. NSC: Hold rating, $158 target. Norfolk Southern stock is trading at a large valuation discount to its peers, Baudendistel said. “We believe the company has a favorable revenue mix given its relatively high portion of revenue represented by intermodal and chemicals, normally among the fastest growing rail revenue segments, and the company has been outpacing the industry on volume growth.”
Union Pacific Corporation UNP: Hold rating, $151 target. Union Pacific is one of the safest railroad stock bets for long-term investors, the Stifel analyst said. “The company’s diversified revenue mix, network through the regions with higher population growth, significant further opportunities for margin growth, an outlook for pricing ahead of rail inflation and massive free cash flow, give us a sense that 'only so much can go wrong' with the exceptions of the potential for an economic decline or ramifications from the persistent service issues that have plagued the rail industry of late."
Canadian Pacific Railway Limited (USA) CP: Hold rating, $201 target. Canadian Pacific now deserves to be considered among the world’s best-run railroads, Baudendistel said. “The past few years, Canadian Pacific Railway has transitioned from arguably the least efficient Class I to arguably the best run railroad as a result of the brief tenure of Hunter Harrison and the implementation of his precision scheduled railroading model, which continues under current CEO Keith Creel."