Top Railroad Stocks for Q2 2023

Greenbrier Companies, Central Japan Railway, and Canadian Pacific Railway are leading railroad industry peers in revenue growth even as the industry struggles on concern about rail strikes in the U.S. and a potential recession.

The iShares U.S. Transportation Average ETF (IYT), a benchmark for railroad, freight, and airline stocks, fell 6% in the past 12 months compared with a 4% drop in the Russell 1000 Index.

We look at the top railroad stocks in three categories: the best value, the fastest growth, and the best performance. All data are as of April 13.

Best Value Railroad Stocks

These are the railroad stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated.

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• Norfolk Southern Corp.: Norfolk Southern is a freight transportation company operating railroad routes in the eastern U.S. On Feb. 3, one of the company's freight trains carrying hazardous materials such as vinyl chloride derailed, which caused a large fire and a local evacuation order in East Palestine, Ohio. Norfolk Southern is now being sued by the U.S. Justice Department and the state of Ohio, to name a few, over violations of state and federal laws about hazardous waste, air pollution, and water pollution negligence. The company's stock price has fallen by 18% since the incident.
• CSX Corp.:  CSX provides rail, intermodal, and rail-to-truck loading services and solutions. It serves customers in various markets, including energy, industrial, construction, agricultural, and consumer products. In September, CSX appointed Joseph Hinrichs as the new president and CEO, succeeding James Foote, who retired. And in the first quarter, the company entered agreements with several unions to offer workers paid sick leave, a sticking point in contract negotiations that almost prompted a railroad strike in 2022.
• Union Pacific Corp.: Union Pacific connects the western two-thirds of the U.S. by rail. It operates rail transportation services from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems, and serves all major Mexico gateways. In late July, Union Pacific said it signed a deal with Wabtec to modernize approximately 600 locomotives. The agreement is valued at more than $1 billion.

Fastest Growing Railroad Stocks

These are the top railroad stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly YOY percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company.

Therefore ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one or the other figure unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of over 1,000% were excluded as outliers.

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• Greenbrier Companies Inc.: Greenbrier is a supplier of equipment and services to global freight transportation markets. The company designs and manufactures freight railcars and marine barges. It also provides freight railcar wheel services, parts, and maintenance, as well as railcar management and leasing services.
• Central Japan Railway Co.: Central Japan operates a transportation business with multiple railways that transport passengers between cities such as Tokyo and Osaka.
• Canadian Pacific Railway Ltd.: Canadian Pacific Railway provides rail and intermodal transportation services across Canada and the U.S., including transportation of bulk commodities, merchandise freight, and retail goods. The company announced a quarterly dividend of $0.19 on Jan. 31, payable on April 24. Canadian Pacific has carried the same quarterly dividend rate of $0.19 since to end of 2021.

Railroad Stocks With the Most Momentum

These are the railroad stocks that had the highest total return over the last 12 months.

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• Alstom S.A.: Alstom is a French rail transport company that builds high-speed trains, monorails, and light commuter trains. The company offers rail infrastructure such as maintenance, signaling, and digital mobility.
• Westinghouse Air Brake Technologies Corp.: Westinghouse Air Brake Technologies, known as Wabtec Corp., provides equipment and services for the freight and transit rail industries. It manufactures and supplies components for new and existing freight cars. The company also builds new commuter locomotives and sells infrastructure and rail control equipment. On Feb. 15, the company reported fourth-quarter earnings; net income increased by 13% on slight revenue growth compared to Q4 2021. Wabtec also repurchased $73 million worth of shares in the fourth quarter, spending a total of $473 million on repurchases in 2022.
• West Japan Railway Co.: West Japan is a passenger transportation company that operates railway lines in Osaka and the surrounding areas. The company also owns retail and convenience stores, hotels, and shopping centers.

Analyzing Railroad Stocks

When analyzing railroad stocks, it is helpful to consider the company's operating ratio. This is the ratio of its operating expenses to revenue. Carefully analyze the company's management team and what they plan to do to lower this ratio in the future. You can also look into train speed and "terminal car dwell." This is the amount of time a rail car remains idle on the platform. If it's unusually high or trains are particularly slow for one company, that should be a red flag. You'd want to see fast-moving freight with little downtime.

You should also survey the railroad's competition in the transportation sector, such as the trucking industry.

Risks of Railroad Stocks

Railroad stocks can be highly volatile during weak economies or when some other sectors are under strain, because railroads and their deliveries connect many sectors of the economy. For example, if there's a shortage of timber and you invest in a railroad company that specializes in transporting timber, that company and your stock may face some losses. Also note the economic state of commodities such as coal, oil, and gas as well as precious metals like gold, silver, and cobalt when considering investing in railroad companies.

Another factor that could affect the performance of railroad stocks is political turmoil. Some people are critical of the oil and gas industry, for instance, so if countries pass laws that limit the production or exposure of oil and gas companies, the railroad companies that serve them may suffer.