Bloomberg | Railroad Profit Rebound Plays Catch-Up to 2016 Stock Surge

01.20.17 | Thomas Black and Frederic Tomesco, Bloomberg

With U.S. railroads forecast to report their first earnings growth since 2015, a stock rally that began in anticipation of the profit rebound is looking overdone.

An index of major carriers has jumped more than 55 percent since sinking to a three-year low Jan. 25, more than doubling the S&P 500 Index’s return. The surge pushed railroad stock prices to more than 21 times earnings, the highest since 2014 for Union Pacific Corp. and the most in at least six years for CSX Corp. and Norfolk Southern Corp., according to data compiled by Bloomberg.

That’s left limited room for additional short-term gains, said John Larkin, an analyst with Stifel Financial Corp. CSX, last year’s top performer, is likely to fall during the next 12 months, based on the average of 25 analyst estimates. Union Pacific is poised to rise less than 5 percent while Norfolk Southern will probably be little changed.

“My sense is the valuations are about as full as they can get,” Larkin said. “For them to go to a higher level you have to have almost the best of all worlds.”

CSX reported adjusted earnings of 49 cents a share Tuesday after the market closed, a penny more than a year earlier and a one cent below expectations from the average of analyst estimates.  The fourth quarter included an extra week when compared with a year earlier, which added 3 cents to earnings per share, CSX said.

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