Shares of the overall sector have slid in Wednesday's pre-market, producing moderate declines in Union Pacific (UNP) , Kansas City Southern (KSU) , Canadian Pacific Railway (CP) and Norfolk Southern (NSC) due to CSX's disappointing results on Tuesday evening. Only Canadian National Railway (CNI) has managed to keep its stock flat as the fears of macro pressures persist.
Still, this response might be undue punishment for the typically reliable railroad stocks.
"The impact to [CSX] earnings estimates are a bit negative (-4% and -5% this year and next), and so we'd expect some moderation in share price [Wednesday] off near all-time highs," Deutsche bank analyst Amit Mehrotra said. "But mid/longer-term we remain encouraged by what we saw in the results, and would use potential weakness in the rail sector tomorrow on the back of these results as a buying opportunity."
Mehrotra cited Union Pacific as his top pick among the bunch as the company continues to excel in implementing precision railroading after the addition of Jim Vena as chief operating officer late last year.
Similarly, Canadian Pacific might have been battered unfairly on Wednesday morning in the eyes of many as its results on Tuesday evening marked a record quarter for the prime mover in precision railroading and diverged sharply from the bearish trends forecast by CSX.
"Diverging volume trends drove the differing outcomes," Loop Capital analyst Rick Patterson commented. "However, in a sense we're looking at the same story in different stages of their evolutions."
Patterson noted that precision railroading has been a hallmark of Canadian Pacific for some time, providing it with more downside protection than its peers.
"CP was first and has had more time to incubate the proverbial pivot to growth where consistently strong service will eventually win over skeptical customers, some of whom have been burned by poor rail service in the past," Patterson said. "While CSX is off to a decent start in this regard, particularly in its merchandise business, it's not there yet and the market is growing impatient. The reality is that it takes years of consistent service to win some of this business off the highways or competing rail carriers and CSX has only demonstrated superior service for about a year now."
In that sense, Patterson suggested it might take years for CSX to catch up to the strides made by Canadian Pacific so far.
Kansas City Southern may be more of a gamble for investors as it should feel the effect of much of the macro pressures moving CSX southbound on Wednesday morning.
And then there is Norfolk Southern.
"The CSX print may not point toward a Q2 miss at NS, as it has more levers to pull on the cost side," Credit Suisse analyst Alison Landry said. "However, investors may be overlooking the cyclical pricing deceleration that is emerging; indeed, a big part of NS' strategy hinges on rate increases - which could put its long-term targets at risk in the coming quarters."
It is worth noting that on the precision front Norfolk Southern maintains an operating ratio near the top of its peer group, well above both CSX and Canadian Pacific.
With some caveats in mind, it might be time for investors to consider riding the rails through the second half of the year. Just make sure you pick up the right ticket.