Union Pacific Corporation (UNP), which is headquartered in Omaha, Neb., and CSX Corporation (CSX), in Jacksonville, Florida, are two popular railroad operating companies in the United States. UNP transports agricultural, automotive and chemical products and offers long-haul routes from all major West Coast and Gulf Coast ports to the eastern gates, connects to Canada’s rail systems and serves the main gateways to Mexico. CSX provides rail, intermodal, national container, barge and contract logistics services around the world, and transports chemicals, minerals, agricultural and food products, as well as coal, coke and ore of iron to power plants, steelmakers and producers, and exports coal to deep-water port facilities.
The rail industry is recovering from its pandemic lows, due to the gradual easing of COVID-19 restrictions and the resumption of industrial activities. President Biden’s proposed infrastructure spending, which includes a blanket federal reauthorization of transportation support, is expected to be a boon to the rail industry. The market size of the US rail transportation industry is is expected to increase by 9.8% in 2021. Thus, UNP and CSX should benefit from it.
While the UNP share price has fallen 3.2% year-to-date, the CSX has risen slightly. CSX is a clear winner with price gains of 14.4% over UNP’s negative performance returns last year. But which of these titles is the best choice now? Let’s find out.
On August 19, Progress Rail, a Caterpillar company, approved the use of a biodiesel blend of up to 20% in specific EMD locomotive series operated by UNP. This will usher in the use of low-carbon fuel in UNP locomotives and is another step towards achieving a long-term goal of reducing absolute greenhouse gas (GHG) emissions of Scope 1 and 2 by 26% by the end of 2030. UNP is seeking a long-term partnership with Progress Rail.
On August 6, 2021, CSX entered into an agreement with the Northern New England Passenger Rail Authority (NNEPRA), one of New England’s largest commercial passenger rail authorities, to support its proposed merger with Pan Am Railways Inc. Given NNEPRA’s role as the primary 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 revenue increased 29.7% year-over-year to $ 5.50 billion. The company’s operating profit was $ 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 revenue increased 32.6% year-over-year to $ 2.99 billion. The company’s operating profit was $ 1.69 billion, up 104.2% from the previous year. However, CSX’s net profit was $ 1.17 billion, indicating an increase of 135.1% over the period of the previous year. Its EPS rose 136.4% year-on-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 grow 28.9% year-on-year in the current quarter, ending September 30, 2021, 21.7% for 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% for the current year and 5.9% next year. The stock’s EPS is expected to grow at a rate of 14.3% 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 grow 23.9% year-over-year in the current quarter, ending September 30, 2021, 25.5% for 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% for the current year and 7.7% next year. Analysts expect the stock’s EPS to grow at a rate of 15.6% per year over the next five years.
In terms of EV / futures 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 last 12 months revenue is almost 1.8 times that generated by CSX. The UNP is also more profitable, with a rate of 59.2% Gross margin against 55.5% for CSX.
While UNP has an overall rating of C, which translates to Neutral in our POWR odds system, CSX has an overall rating of B, which is equivalent to Buy. POWR scores are calculated taking into account 118 different factors, each weighted to an optimal degree.
CSX has a C rating for value, which is consistent with its valuation ratios that are slightly higher than the industry. CSX’s 5.65x futures price / book is 83.8% higher than the industry average of 3.07x. However, the UNP’s D rating for value signifies its overvaluation. The company has a futures price / book of 9.43x, which is 206.9% higher than the industry average of 3.07x.
In terms of Quality, UNP obtained an A rating, which is consistent with its profitability ratios above those of the industry. UNP has a gross profit margin of 59.2% over the past 12 months, which is 103.1% above the industry average of 29.1%. CSX’s B rating for quality is in line with its gross profit margin of 55.5% over the past 12 months, 90.4% above the industry average of 29.1%.
Of the 17 actions of Railroads industry, UNP is ranked # 3 while CSX is # 2.
Beyond what we have stated above, our POWR rating system has also rated CSX and UNP for momentum, stability, sentiment and growth.
Get all UNP odds here. Also, Click here to see additional POWR dimensions for CSX.
Based on the industry’s long-term growth prospects, CSX and UNP are expected to benefit substantially. However, we believe its lower valuation and better analyst sentiment make CSX a better buy here.
Our research shows that the odds of success increase when betting on stocks with an overall buy or strong buy POWR rating. Click here to access the highest rated stocks in the railroad industry.
UNP shares remained unchanged on Monday after trading hours. Year-to-date, UNP has lost -3.61%, compared to a 16.85% increase in the benchmark S&P 500 over the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a particular interest in finding market inefficiencies. She is passionate about educating investors so that they can be successful on the stock market. Following…