Evercore ISI analyst Jonathan Chappell upgraded the ratings of Norfolk Southern Corp (NYSE:NSC) and Old Dominion Freight Line Inc (NASDAQ:ODFL) from In Line to Outperform.
Industry-specific freight demand amid ongoing retail destocking, shaky consumer confidence, and a mix of still-elevated inflation and an uplift in jobless claims has been unpacked for much of the last three months, said the analyst.
The analyst believes a material uplift in fundamental volume or pricing factors could outweigh the legacy macro correlations, but a catalyst for the drivers seems unlikely in the coming quarter.
The analyst said transport stocks may be rangebound, at best, through the summer.
Barring a quick and unexpected reversal in underlying volume or pricing fundamentals, the analyst expects unfavorable macro factors to weigh on share prices across the group through the summer.
The analyst commented that the absence of any volume or pricing recovery would then still warrant material downward estimate revisions, and potential multiple contraction as well.
NSC has underperformed other U.S. rails and every other transport stock under coverage year to date for many obvious reasons associated with the derailment of hazardous train cars in East Palestine, Ohio, in early February, said the analyst.
The headlines and political scrutiny have been intense, and the impact on volumes and costs has been material, weighing on 1Q23 revenue and margins, likely to continue into early 3Q23.
When operations resume and many one-time costs are in the rearview mirror, there is a large top – and bottom -line reversion opportunity for NSC, added the analyst.
The analyst stated that ODFL’s national blue-chip LTL network is not immune to macro headwinds, as seen in the 1Q23 earnings and April-to-date volume figures.
In the macro backdrop required for the others to post volume and margin expansion, ODFL will also return to material top – and bottom-line growth, said the analyst.
Choppy markets alone could result in a flight to quality, and the reversion opportunity for ODFL is robust through yearend, but when investors begin to consider an eventual freight and economic recovery, old faithful will provide significant operating leverage again, the analyst concluded.
