A National Railroad Strike Was Averted. What It Means for Stocks.

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The strike deferment deal with railroad workers brought relief to all industries, and Wall Street was one of them.

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Freight rail stocks have been a favorite as the industry has smartened its operations and profits, but labor problems have put a strain on the sector. If union members ratify the improved pay and work rules of the national contract, investors will consider the stock more beautiful.

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News of a tentative settlement prompted shares of Union Pacific (ticker: UNP) and CSX (CSX) up 4% and 5%, respectively, in premarket trading on Thursday. While rail stocks have easily outperformed the S&P 500 over the past five years, they lagged behind in 2022 as shipping volumes slowed and staffing problems disrupted operations.

But this week as long-running labor talks neared a strike, most analysts surveyed by FactSet maintained their buy recommendations. Higher buy rating will surely follow a contract settlement.

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Union Pacific in the large freight network known as Class 1 railroads; csx; the BNSF unit of Warren Buffett’s Berkshire Hathaway (BKR.A); Canadian Pacific Railway (CP); canadian national railway

(CNI); and Norfolk Southern (NSC).

Rail stocks are trading at the high end of the freight economy, with their price-earnings ratio tightly tied between 16 and 17 times 2023 earnings. By comparison, trucking and logistics stocks have a wider spread of income multiples that average into the lower teens. Analysts had expected the rail strike could give truck drivers — such as Knight-Swift Transportation Holdings (KNX) or Werner Enterprises (WERN) — a brief jump in their spot rates, but for now it looks like trains will continue to run.

Train movement was slowed this year by labor exodus and slow hiring, and travel disruptions in the rail industry turned to “precision scheduled railroading”. If the new deal makes engineers and conductors happy to take the jobs and stay on them, investors will be happy.

Contract ratification will, of course, lead to immediate wage payment by railroads. The 14% catch-up pay was considered in wage provisions recommended by President Joe Biden’s emergency panel last month, which covers years after the last contract expires in 2020.

Analysts at Cowen estimate that labor costs on the railroad will increase by about 4%. Railroaders measure their efficiency at the business level by comparing operating costs with revenue, in a measure they call their “operating ratio.” The recommended wage increase would have increased the wages of union workers by about 24% by 2024.

But railroads are regulated monopolies and they have been able to raise rates in recent years. At a conference last month, Kevin Boone, head of sales and marketing at CSX, said the highly public terms of the presidential panel’s salary recommendations should help railroads recover some of those costs from customers.

Write to Bill Alpert at [email protected]

Credit: www.marketwatch.com /

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