UNP or NSC: Which Railroad is Better Placed Pre Q1 Earnings?

As the Q1 earnings season is just round the corner, market experts are preparing to compare estimates with actual outcomes. Right now, investors are looking to add stocks that have the potential to surpass earnings expectations in the quarter. This is because an earnings beat positively impacts the stock price.

In fact, the projection regarding Q1 is very encouraging. Per the latest earnings outlook, the bottom line for S&P 500 companies is expected to expand at a highly impressive rate of 16% on a year-over-year basis. Total revenues for the same set of companies are projected to grow 7.4%. The report further predicts that 11 of the 16 Zacks sectors will end the Q1 earnings season with the bottom line improving year over year.

One of those sectors is transportation sector, wherein the top and bottom line are expected to increase 7.4% and 14.5%, respectively. Notably, this highly diversified sector includes railroads and airlines among others.

Given this backdrop, it is not a bad idea to indulge in a comparative analysis of key railroads — Union Pacific Corporation UNP and Norfolk Southern Corporation NSC —  ahead of their respective Q1 earnings reports. Norfolk Southern is slated to report on Apr 25, while Union Pacific is scheduled to unveil its earnings numbers a day later.

As both railroads are on the same footing, carrying a Zacks Rank #3 (Hold), we use certain other parameters to find out which company is better positioned ahead of the Q1 reporting cycle. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

When considering price performance in a year’s time, Union Pacific clearly scores over Norfolk Southern. Union Pacific has gained 24.1%, higher than its industry’s 14.8% rally. Meanwhile, Norfolk Southern has gained 13.9% in the same time frame.

 

Valuation

Compared with the S&P 500, the broader industry is overvalued. The industry has an average trailing 12-month P/B ratio – which is commonly used for valuing railroads because of large variations in their earnings results from one quarter to the next – of 3.8. This is a tad higher than the S&P 500 average of 3. 7.

 

Coming to the two stocks under consideration, with a P/B ratio of 2.3 Norfolk Southernis undervalued compared with the S&P 500 and the industry. However, Union Pacific scores poorly on the valuation front and is overvalued compared with the industry and the S&P 500, with a P/B ratio of 4.2. Consequently, this Omaha, NE-based railroad operator is pricier than its Norfolk, VA-based counterpart.

 

Dividend Yield

The new tax law (Tax Cuts and Jobs Act), which reduces corporate tax rate significantly, is a huge positive for railroads. This apart, the new law allows these companies to deduct their capital expenditures from taxable income in the year of occurrence, which was not allowed earlier. This aspect hugely favors railroads as they invest substantially in capital expenditures.

The massive savings prompted by the Tax Cuts and Jobs Act is favorable for shareholder-friendly activities like dividend payments and buybacks. In fact, both Union Pacific and Norfolk Southern have hiked the respective dividend payouts this year. Also, other railroad stocks like Canadian National Railway Company CNI and CSX Corporation CSX have announced dividend hikes this year.

Coming back to the two stocks under consideration, Union Pacific’s dividend yield over a year is 2.2%. With a dividend yield of 2.18%, Norfolk Southern shareholders fetch a slightly lower dividend yield than its larger rival.

 

Earnings History and ESP

Considering a more comprehensive earnings history, Norfolk Southernhas delivered a positive surprise in each of the trailing four quarters, with an average beat of 7.2%. Union Pacificemerges second best in this respect, having outshined the Zacks Consensus Estimate in three of the last four quarters, with an average earnings surprise of 3.3%.

However, the Earnings ESP scenario is quite a contrast, with Union Pacific’s reading at +0.22% and Norfolk Southern’s at -2.56%.

Conclusion

Our comparative analysis shows that Norfolk Southernholds an edge over Union Pacific, when considering a more detailed earnings history and valuation. Nevertheless, Union Pacific is superior when considering dividend yield and price performance.

Additionally, Union Pacific has a positive ESP reading unlike Norfolk Southern. Although, both stocks have a the same Zacks Rank and seem to be evenly matched, Union Pacific is preferable ahead of earnings, since it holds a clear edge in the Earnings ESP stakes.

According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 or better — to increase the odds of an earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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