Wells Fargo initiated coverage of rail stocks with Outperform ratings for CSX, Norfolk Southern (NYSE:NSC) and Canadian Pacific (NYSE:CP), and at Neutral for Union Pacific (NYSE:UNP), Canadian National (NYSE:CNI) and Kansas City Southern (NYSE:KSU).
Wells sees Eastern rails as particularly well positioned to leverage the impact of a rebound in coal prices after eight-year slump, as higher natural gas prices should benefit utility coal stockpiles and seaborne coal markets.
The firm thinks CSX should see among the highest leverage from a coal price recovery given its unique exposure to export markets in addition to domestic utility coal, and should benefit by new leadership from Hunter Harrison.
NSC has among the greatest potential for operating ratio improvement among the rails over the next several years amid years of network rationalization and cost cutting initiatives by the Eastern rails, according to Wells.
After a turnaround, CP is now an industry leader in terms of margins, returns and free cash flow conversion, the firm says.
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