Bernstein analyst David Vernon upgraded the rating of some rail stocks, given the U.S. rail industry outlook for FY24.
The analyst says that the spot truck market has been in a correction for around 21 months, with the contract market declining in the last 12 months and running ~5% below the long-term trend.
While Vernon writes that the end of the downturn in truck pricing is nearing, the exact timing of an inflection in contract rates is unknown.
The analyst says the normal second-quarter seasonal uptick in freight demand should bring contract truck rates to an inflationary state by the third quarter. Vernon expects the next peak to be higher than the last peak.
The analyst favors companies with higher exposure to truck volumes for the next up cycle in Intermodal business and projects recovery in Merchandise/Industrial business in second half of 2024 thanks to expected demand improvement and economies lapping the effects of rate increases.
Also, Vernon writes that export met coal volumes is expected to remain similar Y/Y in 2024 as domestic production is constrained, but profit pool may decline.
The analyst thinks that high quality, low volume dividend paying stocks will get a look as the interest rate regime turns, and railroads fit that bill.
Consequently, the analyst upgraded Union Pacific Corp
Also, Vernon raised the rating on Norfolk Southern Corp
Also, the analyst reiterated the Market-Perform rating on CSX Corp