UBS cuts U.S. rail EPS forecasts, citing softening industrial markets

Investing.com -- UBS Global Research has revised its financial outlook for U.S. rail companies, leading to reduced EPS estimates and price targets, citing potential softening in industrial end markets.

UBS analysts express concerns that in 2025, inflation could outpace revenue generated from price and mix for Union Pacific (NYSE:UNP), CSX (NASDAQ:CSX), and Norfolk Southern Corporation (NYSE:NSC). 

While strong productivity gains are still anticipated for UNP and NSC, these are not projected to offset the impact on EPS.

Specifically, UBS Global Research has lowered its 2025 EPS estimates: for UNP from $11.80 to $11.60, for NSC from $12.90 to $12.60, and for CSX from $1.83 to $1.71. 

The analysts also adjusted their 2026 EPS estimates downward (UNP by 4%, NSC by 7%, and CSX by 8%) to reflect yield performance aligned with a more subdued cyclical rebound. 

This has resulted in revised price targets: CSX’s price target has been cut from $39 to $36, NSC’s from $305 to $284, and UNP’s from $255 to $245.

UBS analyzes factors affecting rail industry pricing and profitability. For CSX and NSC, price/mix contributed to revenue growth in 2024 (CSX: 2.5%, NSC: 1.9%), but growth is forecast to slow in 2025 (CSX: 0.2%, NSC: 1.2%) due to declines in coal yield and flat merchandise volume. 

In contrast, UNP’s price/mix is projected to improve from a 0.9% year-over-year increase in 2024 to a 2% increase in 2025, driven by flat intermodal yield and growth in coal yield.

The analysts flag a broader trend of downshifting in rail industry pricing since the early 2010s, increasing cyclicality. 

Coal yields ex. fuel, which grew at an average of 6% per year from 2005 to 2015, slowed to 2% from 2015 to 2024, influenced by completed repricing of long-term contracts and linkage to commodity prices. 

Merchandise revenue per car ex. fuel growth moderated from an average of 5% annually (2005-2015) to 2.5%-3% since, with the lowest growth (around 2% per year) during 2015-2021, coinciding with Precision Scheduled Railroading (PSR) implementation. 

Intermodal yields ex. fuel consistently grew in the 1.5%-2% range until 2023/2024.

Productivity gains are increasingly important for U.S. railroads. From 2005 to 2021, U.S. rails reliably delivered growth in revenue per mile ex. fuel that exceeded cost per mile by 150-200 basis points per year.

While the revised estimates for UNP and NSC reflect a similar spread in 2025 and 2026, this is largely attributed to cost-side productivity improvements. 

The analysts suggest that while rails can achieve strong productivity in an environment of weak volumes, achieving high single-digit or better earnings growth will require improvement in both price/mix and volume.