Union Pacific Corporation (UNP), which is headquartered in Omaha, Neb., and CSX Corporation (CSX), in Jacksonville, Fla., are two popular railroad operating companies in the United States. UNP hauls agricultural, automotive, and chemical products and offers long-haul routes from all major West Coast and Gulf Coast ports to Eastern gateways, connects with Canada’s rail systems and serves the major gateways to Mexico. CSX provides rail, intermodal, domestic container-shipping, barging, and contract logistics services worldwide, and transports chemicals, minerals, agricultural and food products, and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, and industrial plants, as well as exports coal to deep-water port facilities.
The railroad industry is recovering from its pandemic lows, owing to the gradual easing of COVID-19 restrictions and the resumption of industrial activities. President Biden’s proposed infrastructure spending, which includes a general federal transportation support reauthorization, is expected to be a boon for the railroad industry. The market size of the U.S. rail transportation industry is expected to increase by 9.8% in 2021. So, both UNP and CSX should benefit.
While UNP share price has declined 3.2% year-to-date, CSX has surged marginally. CSX is a clear winner with 14.4% price gains versus UNP’s negative returns in terms of their past year’s performance. But which of these stocks is a better pick now? Let’s find out.
On August 19, Progress Rail, a Caterpillar company, approved using up to 20% biodiesel blend in specific EMD locomotive series operated by the UNP. This will usher in low carbon fuel usage in UNP locomotives and is another step toward achieving a long-term goal to reduce absolute scope 1 and 2 greenhouse gas (GHG) emissions by 26% by the end of 2030. UNP is looking for a long-term partnership with Progress Rail.
On August 6, 2021, CSX reached an agreement with the Northern New England Passenger Rail Authority (NNEPRA), one of New England’s largest passenger rail trade authorities, to support its planned merger with Pan Am Railways Inc. Given NNEPRA’s role as the primary state sponsor of Amtrak’s Downeaster passenger rail service between Brunswick, Maine, and Boston, Massachusetts, CSX will maintain or improve passenger service in the region.
Recent Financial Results
For its fiscal second quarter, ended June 30, 2021, UNP’s total revenues increased 29.7% year-over-year to $5.50 billion. The company’s operating income came in at $2.47 billion for the quarter, up 49.5% from the prior-year period. While its net income increased 58.8% year-over-year to $1.80 billion, its EPS increased 62.9% to $1.23. As of June 30, 2021, the company had $1.12 billion in cash and cash equivalents.
For its fiscal second quarter, ended June 30, 2021, CSX’s revenue increased 32.6% year-over-year to $2.99 billion. The company’s operating income came in at $1.69 billion, up 104.2% from the year-ago period. However, CSX’s net earnings were $1.17 billion, indicating a 135.1% increase from the prior-year period. Its EPS increased 136.4% year-over-year to $0.52. The company had $2.97 billion in cash and cash equivalents as of June 30, 2021.
Past and Expected Financial Performance
UNP’s EBITDA and total assets have grown at CAGRs of 0.7% and 1.9%, respectively, over the past three years. Analysts expect UNP’s EPS to increase 28.9% year-over-year in the current quarter, ending September 30, 2021, 21.7% in the current year, and 12.6% next year. Its revenue is expected to grow 11.9% year-over-year in the current quarter, 10.3% in the current year, and 5.9% next year. The stock’s EPS is expected to grow at a 14.3% rate over the next five years.
In comparison, CSX’S EBITDA and total assets have grown at CAGRs of 4.5% and 2.7%, respectively, over the past three years. CSX’s EPS is expected to increase 23.9% year-over-year in the current quarter, ending September 30, 2021, 25.5% in the current year, and 14.2% next year. Its revenue is expected to grow 18.8% year-over-year in the current quarter, 14.8% in the current year, and 7.7% next year. Analysts expect the stock’s EPS to increase at a 15.6% rate per annum over the next five years.
In terms of forward EV/Sales, UNP is currently trading at 7.46x, which is 10.5% higher than CSX’s 6.75x. In terms of forward EV/EBITDA, UNP’s 13.78x is 11.1% higher than CSX’s 12.40x.
UNP’s trailing-12-month revenue is almost 1.8 times what CSX generates. UNP is also more profitable, with a 59.2% gross profit margin versus CSX’s 55.5%.
While UNP has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, CSX has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
CSX has a C grade for Value, which is consistent with its slightly higher than industry valuation ratios. CSX’s 5.65x forward Price/Book is 83.8% higher than the 3.07x industry average. However, UNP’s D grade for Value signifies its overvaluation. The company has a 9.43x forward Price/Book, which is 206.9% higher than the 3.07x industry average.
In terms of Quality, UNP has been graded an A, which is consistent with its higher-than-industry profitability ratios. UNP has a 59.2% trailing-12-month gross profit margin, which is 103.1% higher than the 29.1% industry average. CSX’s B grade for Quality is in sync with its 55.5% trailing-12-month gross profit margin, 90.4% higher than the 29.1% industry average.
Of the 17 stocks in the Railroads industry, UNP is ranked #3, while CSX is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has also rated CSX and UNP for Momentum, Stability, Sentiment, and Growth.
Based on the industry’s long-term growth prospects, both CSX and UNP should benefit substantially. However, we think its lower valuation and better analyst sentiment make CSX a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Railroads industry.
Want More Great Investing Ideas?
UNP shares were unchanged in after-hours trading Monday. Year-to-date, UNP has declined -3.61%, versus a 16.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
More Resources for the Stocks in this Article
|Ticker||POWR Rating||Industry Rank||Rank in Industry|
|UNP||Get Rating||Get Rating||Get Rating|
|CSX||Get Rating||Get Rating||Get Rating|