Railroad giants appear well-positioned heading into 2023, as they feature unique characteristics that should shield them against a potentially continued economic downturn. I am especially keen on Union Pacific Corporation (NYSE: UNP), Canadian Pacific Railway Limited (NYSE: CP), and CSX Corporation (NASDAQ: CSX), three giants in the industry whose enormous scale and critical operations are set to keep generating strong cash flows, moving forward.
Don't Miss our Black Friday Offers:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Why Railroad Giants Are Ideal Right Now
Many investors fear that the macroeconomic turmoil of 2022 will persist into 2023, which could mean more downside for stocks. Railroad giants, however, can be ideal investments in the current market environment due to their unique attributes, which could provide a margin of safety in the face of elevated uncertainty.
Stable and Predictable Revenue Streams
Railroads, especially those operated by three major players in the industry, are used to transport a broad range of goods covering long distances. Many of these goods, including coal, oil, and agricultural products, are necessities and generally remain in high demand in all economic scenarios.
This is especially true today, as commodities such as grain and coal, whose supply was disputed due to the war in Ukraine, cover longer transportation routes and are in higher demand than the previous years.
Another factor that contributes to railroad giants producing predictable revenues is the fact that they remain the most scalable and efficient operators against any alternative solution. When it comes to being able to move enormous volumes of goods over long distances at the lowest cost per unit possible, railroads beat other forms of transportation, such as trucking, by a wide margin.
Finally, railroads often sign long-term agreements with their clients, helping railroad companies enjoy predictable revenue streams.
Strong Moats Reduce Uncertainty
Another point to make for railroad operators is that they feature strong moats, which translate to essentially no competition in their respective markets, lowering their risk.
The competitive advantage comes from the fact that the railroad industry has some of the highest barriers to entry among any other industry. Developing and operating a railroad is a complicated and costly procedure. It demands massive capital expenditures to construct tracks, bridges, and tunnels, as well as to buy or lease locomotives and railcars. Thus, it would be nearly impossible for an up-and-coming competitor to compete with an established giant in the industry.
As if this wasn’t a good enough barrier to entry, railroads must also obtain government approval and obtain rights-of-way to operate. Following a recession, it’s common for new competitors to arise across multiple industries. If one were to occur this year, you don’t have to worry about such a scenario as an investor in the railroad industry.
They Focus on Creating Shareholder Value
Finally, I like railroad giants during uncertain environments due to the consistent focus they have shown on creating shareholder value even during recessionary periods. Canadian National Railway and CSX Corporation, for instance, have grown their dividends annually over the past 27 and 17 years, respectively. In addition, between 2014 and 2021 (just before the merger with KCS), Canadian Pacific went on to repurchase about 1/4 of its outstanding shares.
Their oligopolistic business models and lack of fear of potential competition should allow all three companies to grow and operate in a predictable manner. Therefore, I believe that UNP, CP, and CSX, will continue to keep focusing on how to maximize shareholder value even if market conditions in 2023 are not optimal.
What are the Price Targets for UNP, CP, and CSX Shares?
Turning to Wall Street, Union Pacific has a Moderate Buy consensus rating based on nine Buys, eight Holds, and one Sell assigned in the past three months. At $216.72, the average Union Pacific stock forecast suggests 4.7% upside potential.
When it comes to Canadian Pacific, the stock also has a Moderate Buy consensus rating based on nine Buys and six Holds assigned in the past three months. At $83.56, the average Canadian Pacific stock forecast suggests 12% upside potential.
Finally, CSX has drawn a Moderate Buy consensus rating based on 13 Buys, three Holds, and one Sell assigned in the past three months. At $33.41, the average CSX stock forecast suggests 7.8% upside potential.
Takeaway – Boring but Reliable Investments
Railroad stocks are boring investments that won’t make you rich overnight. Their growth is usually slow and limited by the growth of the overall economy, as the existing railroad giants are already ultra-mature and established businesses.
Nevertheless, they are able to create shareholder value steadily due to their unique qualities, which protect them from multiple risks that other industries are occasionally threatened by. If uneasiness in the markets persists through 2023, these qualities are likely to be appreciated, which could result in investors flocking to railroad stocks.
So, whether you are buying railroad stocks for their long-term prospects or as a less risky investment through 2023, I believe Union Pacific, Canadian Pacific Railway, and CSX are likely to serve you well as we advance.
