UBS: Gridlock Making Railroads More Attractive

If you're looking for upside in the North American railroad sector following the recent 4.8% drop in weekly U.S. carloads, then UBS analysts suggest you take a peak out the car window at the gridlock that surrounds you on your drive to and from work.

"U.S. rail volumes declined 2.5% last year, but if the state of the national highway system is any indication, down years could soon become a rarity," Rick Paterson and Fadi Chamoun wrote in a research note on the state of the railroads.

They cited recent data from the U.S. Federal Highway Administration that compares estimated peak period congestion in 2020 with peak period congestion in 1998, and reflecting the increase in routes that are approaching and/or exceeding capacity, concluded "the slow parade on our highways makes the long-term outlook for the rails appear fairly rosy, even during the last gloomy days of 2007,"

In fact, they added, the current freight recession may be a blessing as prices have held steady and railroads have been given the opportunity to expand their networks.

Of the seven railroads under coverage at UBS, six are rated as "buy" including Canadian National Railway Co. (CNI), which garnered a C$66 price target, and Canadian Pacific Railway Limited (CP), whose price target is flagged at C$80.