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Investing.com -- Bernstein analysts listed two Outperform-rated rail stocks they see as best positioned in the U.S. railway sector, with focus chiefly on more mergers in the sector as a driver of growth. They noted that rail traffic trends were "decent" in the third quarter, but margins remained weak.
Bernstein said the current fragmentation of the U.S. freight rail system has limited growth potential and created inefficiencies. Their top picks focus on companies that could overcome these limitations through strategic consolidation:
Union Pacific Corporation (UNP)
Rated as "Outperform" with a target price of $294.00, Union Pacific stands out for producing the highest rate of return in the railroad industry. Bernstein believes the potential merger with Norfolk Southern could unlock significant growth in both carload and intermodal traffic. While the merger review process carries some risk and will take time, analysts project that a transcontinental railroad will ultimately deliver better growth than regional operations. As regulatory approval becomes clearer over the next year, Bernstein expects the stock to move toward its full potential.
In recent developments, Union Pacific has reached ratified agreements with 11 unions and secured interim deals with two of its largest unions.
Also rated "Outperform" with a target price of $347.00, Norfolk Southern appeals to Bernstein as a turnaround opportunity with unique cost-cutting potential and cyclical exposure. The firm is particularly optimistic about NSC’s prospects as part of the proposed UNP-NSC transcontinental railroad. Bernstein suggests that as the path to regulatory approval becomes more defined over the coming year, NSC could trade through the value of consideration proposed at the time of the merger announcement.
Both companies represent opportunities in what Bernstein sees as a necessary evolution of America’s freight rail system. The firm’s analysis suggests that while regulatory hurdles exist, the long-term benefits of consolidation could significantly enhance growth prospects for these top railway operators.
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