MW Trump tariff uncertainty, bad weather loom over railroads. Here's why that matters.

By James Rogers

CSX kicks off railroad-operator earnings when it reports first-quarter results after market close Wednesday

Earnings for railroad operators kick off this week when CSX Corp. reports first-quarter results after market close Wednesday, as tariff uncertainty and difficult weather conditions in recent months overshadow the sector.

How the sector performs could provide an early glimpse into the health of the U.S. economy, because the transportation of goods can serve as a leading indicator of changes in consumer demand.

So far this year, the transportation sector has been underperforming the broader market by a wide margin, so railroad earnings, and in particular the outlook they provide for the rest of the year, could go far in either confirming or dispelling investors' fears. The Dow Jones Transportation Average DJT has dropped 14.6% year to date, while the Dow Jones Industrial Average DJIA has slipped 4.4%.

A big reason for the underperformance was the imposition of President Donald Trump's "liberation day" tariffs on April 2, which roiled markets and set off a trade war with China. Last week Trump dropped the tariff rate to 10% for most countries but slapped China with a 145% tariff rate.

"The elephant in the room has nothing to with [the first quarter], and everything to do with [Washington, D.C.]," Stifel analyst Benjamin Nolan wrote in a note on Sunday.

Nolan said that while he expects tariffs to slow the economy and shrink trade, railroads may be somewhat insulated from the effects. But he added that railroads are particularly vulnerable to shifts in international trade policy, with approximately 38% of total U.S. rail traffic tied to global trade.

"While trade exposure varies by carrier, sustained tariffs will inevitably have some impact across the freight landscape," Nolan wrote.

"Southeastern carriers tend to be more domestically focused," he added. "CSX, for example, has stated that its grain exports are largely directed to South America, and its coal exports to China are minimal."

Related: FDX, Norfolk Southern, Canadian Pacific downgraded on tariff woes as stocks dip

While East Coast railroads have lower direct exposure to international trade, they are not immune to broader market disruptions, according to Stifel.

"Over the long term, however, these carriers - especially in the Southeast - could stand to benefit from reshoring trends," Nolan wrote.

Related: Trump's pick to lead Federal Railroad Administration a positive for railroad stocks: analyst

Nolan maintained his buy rating on CSX's stock $(CSX)$ but lowered his price target to $34 from $37. He kept his hold rating on rival Norfolk Southern Corp.'s stock $(NSC)$ but lowered its price target to $247 from $265.

Union Pacific Corp. $(UNP)$ faces the highest downside risk from the ongoing effects of Trump's tariff policies, potentially more so than East Coast operators and possibly even more than Canadian carriers, according to Stifel.

"Roughly 33% of [Union Pacific's] international volumes - particularly in intermodal, grain, and coal - are vulnerable to Asian trade restrictions," Nolan wrote. "Meanwhile, although U.S. tariffs could weigh on cross-border volumes for Canadian railroads, increased activity through Canadian and Mexican ports may offset some of the pressure and could even support international volume growth."

The term intermodal refers to goods carried on different modes of transport.

Related: Tariffs are an uncertainty but not a worry, railroad operator Norfolk Southern says

But tariffs aren't the only things affecting railroads' performance in the latest quarter.

"Mother Nature pressured [first-quarter] results for many of the Class I rails with only [Union Pacific] exceeding our original volume growth expectation," Benchmark analyst Nathan Martin wrote in a note released Monday. "Heavy snow, flooding, earthquakes, and extremely cold temperatures all combined to slow down networks, especially in February."

A Class I carrier is defined as any carrier earning annual revenue greater than $1.05 billion, according to the U.S. government's Surface Transportation Board.

Martin said the "on again, off again" tariff situation continues to cause a lot of uncertainty not only for the railroad operators, but for their customers as well.

Related: CSX stock sees biggest drop in 3 years after railroad warns of hurricane impact, discloses SEC subpoena

Citing data from the American Association of Railroads, Benchmark's Martin estimates that CSX's carloads declined 1% year over year in the first quarter, versus Benchmark's expectation of a 1% gain.

Still, Martin believes CSX's results could show pockets of strength, because some customers tried to front-run expected higher costs as a result of the tariffs.

"Strength in fertilizers was likely driven by some pull forward ahead of tariffs," Martin wrote. "Intermodal traffic probably saw some benefit as well with both domestic and international volumes up."

-James Rogers

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 14, 2025 11:06 ET (15:06 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.