CSX Earnings Miss Derails Railroad Stocks

Disappointing Q2 CSX Earnings

Disappointing second quarter (Q2) earnings from railroad giant CSX Corporation (CSX) sent leading stocks within the industry off track. Not only did the company miss Wall Street's top- and bottom-line estimates, but it also slashed its 2019 full-year revenue guidance.

The East Coast railroad operator said that it now sees revenue for the year falling between 1% and 2%, compared to its earlier forecasts of an increase by about that amount. Mark Kenneth Wallace, executive vice president of CSX, cited a softer industrial environment amid signs of a slowing economy in the second half for the downward revenue revision. "We've obviously seen evidence of this in our own business and now see a softer industrial environment, with signs in our automotive, chemicals, and metals segment," Wallace said during the earnings call, per CNBC.

Investors will be eagerly awaiting earnings from other leading railroad companies in the coming days to gauge the impact of the ongoing U.S.-China trade war and its impact on the domestic economy. Traders who follow the industry should add these three stocks to their watchlist as the earnings train continues rolling. Let's explore several trading possibilities.

Union Pacific Corporation (UNP)

With a market capitalization of $116.48 billion, Union Pacific Corporation (UNP) operates as a rail transportation business, hauling coal, industrial products, intermodal containers, agriculture goods, chemicals, and automotive goods. Although the Omaha, Nebraska-based railroad operator has surpassed analysts' earnings estimates over the past four consecutive quarters, its Q2 results may come under pressure from weaker freight demand caused by trade uncertainty and inclement spring weather. The Street expects Union Pacific to post earnings per share (EPS) of $2.12 for the period when the company reports results before the opening bell on Thursday, July 18. The stock issues a dividend yield of 2.01% and is trading up nearly 30% on the year as of July 18, 2019.

Union Pacific shares gapped 8% higher in early January after the company announced that it had hired a new chief operating officer to oversee and implement a performance strategy. The stock continued higher until mid-February before a pullback to the 50-day simple moving average (SMA). Since then, the price has traded mostly sideways as investors ponder what impact the year-long trade war will have on railroad stocks. The stock came off the tracks in Wednesday's trading session, closing below a crucial support level at $165 on above-average volume. Those who execute a short sale should consider buying to cover at $150, where the price finds horizontal line support. Protect the position with a stop just above the 50-day SMA.

Norfolk Southern Corporation (NSC)

Norfolk Southern Corporation (NSC) engages in the rail transportation of raw materials, intermediate products, and finished goods such as chemicals, agricultural products, construction materials, and automotive parts. Analysts expect the $50.81 billion railroad company to report Q2 EPS of $2.78 when it discloses financial results before the market open on Wednesday, July 24. While earnings projections reflect an 11.2% year-over-year (YoY) increase, the consensus EPS estimate for the quarter has been revised by 0.29% lower over the past 30 days. With weaker demand gripping the industry, investors will closely monitor revenue, which is expected to grow 1.4% from the year-ago quarter. Despite returning 28.89% YTD, the stock has underperformed the railroad industry average by about 1% as of July 18, 2019. Investors receive a 1.69% dividend yield.

The Norfolk Southern share price trended sharply higher from late December through April. Since that time, the stock has oscillated roughly within a 15-point trading range. Wednesday's 7.48% fall on heavy volume indicates that the bears have plans to move the price lower. Before entering a short position, traders may want to wait for the price to close below key support at $190. Think about setting a take-profit order near $170 – a significant support level where the price may catch a bid. Manage risk by placing a stop slightly above yesterday's high at $201.49 and amending it to the breakeven point if price falls below the 200-day SMA.

Kansas City Southern (KSU)

Kansas City Southern (KSU) provides rail transportation services in the United States as well as areas of Mexico. The rail operator's freight includes industrial and forest products, chemicals and petroleum, agriculture and minerals, and energy and autos. In total, the company's rail network stretches across approximately 6,700 miles. The market expects Kansas City Southern's Q2 earnings to track 4.5% higher YoY to $1.61 per share and revenue to jump by 3.5% to $706.23 million when the railroad company holds its earnings call before the market opens on Friday, July 19. Performance-wise, the stock, which pays a 1.17% dividend yield, is trading toward the top end of its 52-week range between $90.55 and $125.92 and has returned 23.11% YTD as of July 18, 2019.

The May 31 downside gap caused by the Mexican tariff threat closed within several trading days on news that the United States and Mexico successfully negotiated an immigration deal. Kansas City shares continued their journey higher until yesterday when the stock plunged nearly 5% on the back of the CSX's weak earnings. A convincing close below a seven-month uptrend line may cause selling to accelerate in subsequent trading sessions. The relative strength index (RSI) sits well above oversold levels, giving the price plenty of room to fall further. Those who short at current levels should aim to book profits at the critical support zone between $107.50 and $102.50. Consider setting a stop-loss order above either the 50-day SMA or yesterday's high at $120.19.