We lower our third-quarter rail estimates for CSX and Union Pacific (UP), while increasing estimates for Norfolk Southern (NS), as we adjust volumes, yield assumptions, and fuel tailwinds (U.S. on-highway diesel declined 7% through 3Q). Carloads have inflected positively in recent weeks when compared to 2019 levels. Carload strength QTD for the U.S. carriers (+6.1%) has been led by agricultural products at +12.8% and intermodal at +12.3%. This has partially offset by coal weakness, down 7.8% for the U.S. group. CSX PT to $35. UNP PT to $252.
We caught up with all the U.S. rails ahead of quiet period: we favor NS over CSX into the print given cost initiatives at NS that appear to be on track (not including Hurricane Helene impacts) and volume growth tracking well above our previous estimates (+2.9% QTD for CSX and +7.5% for NS). CSX and NS were both impacted by the hurricane last week; CSX and NS both experienced a damaged network that caused delays, impacted service, and added costs. It will likely negatively impact the final days of the third quarter and bleed into the final quarter of the year.
We attended UP investor day in Dallas, Tex., where the company showcased its growth initiatives and deep bench. UP offered three-year financial guidance that we believe to be very achievable. UP expects revenues to outpace volume and looked at economic indicators (industrial production, consumer spending, autos, housing) to gauge growth projections. High-single to low-double-digit EPS CAGR over the next three years falls short of our previous 15% growth assumption in 2025 (consensus forecast has 12% growth next year), though we note the low end of the EPS range is where the S&P global forecasts are (which assume muted growth). CEO Jim Vena continued to be adamant that UP will have the best margins in the industry going forward. In the near-term, international IM mix (which is +30% QTD and runs at approximately $1,200 per car) should challenge yields in the third quarter. We expect PT costs to step up more than previously anticipated in the quarter. UP stands to benefit in the near-term from an elongated East/Gulf Coast port strike that has driven intermodal volumes West (see below).
Hurricane Helene Impacting the Eastern Rail Network
CSX: The latest advisory update as of Sept. 30 now has all of Florida, Midwest, and the Southern Florida zone fully operational. The Georgia zone remains mixed but mostly operational, primarily due to a power outage. Carolina zone remains mixed due to power outages, severe flooding and infrastructure damage in the Blue Ridge subdivision.
NS: The latest advisory update as of Sept. 30 has most major routes in service, though still has a handful of routes still out of service. Asheville routs east to west are flooded, approximately 70 miles of tree removal needed in Georgia, and multiple power outages.
We expect volume headwinds to the final week of the quarter, and potentially increased costs in the fourth quarter. We will continue to monitor the ongoing situation and the implications it will likely have on third-quarter earnings.
Rail Survey
Third-quarter shipper survey results are a negative for the rail group. Rate hike expectations for the next 6-12 months came in at 3.1%, declining 30bps sequentially and once again falling below the survey’s long-term average of 3.5%. The proportion of shippers seeing rail prices 5-10% cheaper than truck also increased considerably in the third quarter for both bulk and intermodal, at a time when TL rates have bounced along trough. Choppy pricing outlook suggests shippers expect TL overcapacity to continue to pressure base pricing into the next bid cycle, notwithstanding the strong intermodal volume growth seen in the third quarter (though the outperformance has been primarily on the international side). Given the decelerating pricing expectations and a soft industrial economy that hasn’t shown any sign of inflection, our base case assumption is that U.S. Class I yields in the coming quarters should remain pressured. We acknowledge that freight markets could quickly become capacity constrained here in the near-term given the impacts of Hurricane Helene.
We asked shippers if they had pulled forward peak season freight due to numerous uncertainties (port strike, tariffs, Red Sea) and 28% of participants told us they had done so. At the same time, approximately 26% of shippers believe restocking has already intensified (a bullish longer-term signal). Additionally, about half of participants expect shipments to remain in warehouses for less than a month, similar to last quarter, implying robust restocking demand. Results indicate to us both pull forward and traditional peak factors are drivers of the ongoing surge in imports and intermodal volumes. In our view, this suggests volume strength can continue into the fourth quarter and lines up with commentary we heard on our State of the Ports call from the head of the Port of Los Angeles pointing to a robust October. 2025 volume outlook remains fairly muted given unknowns for industrial production, consumer spending, housing demand, a sentiment that was reiterated by Class I railroads at the NEARS conference we recently attended and pegged to UP’s LT financial outlook
Business growth expectations over the next 12 months also declined 30bps sequentially to 2.2% in the third quarter, falling further below the survey’s long-term average, and breaking a three-quarter streak in improvements. Similarly, economic confidence declined four points sequentially. Survey results point to macro uncertainty though we note that a portion of responses were received before the 50bps cut in the Fed Funds Rate in September. East Coast Freight Diversions We once again asked participants about their stance on shifting volumes away from the East Coast and responses attest to diversions (we note this survey was taken just before the start of the current EC/GC port strike). Of participants that were considering a shift, the proportion that saw a 10%-15% shift stood at 31%, which is considerably higher than the 10% response we received in the second quarter. A majority (62%) of shippers expect to move freight back to original entry points within a month of resolution on the East Coast. We note however, that the anticipated duration of this strike has likely extended since responses were collected, and we would not be surprised to see a more protracted return to normal if a strike drags on beyond this week.
Shippers’ Rail Pricing Expectations
Rail Service
Notwithstanding impacts of the recent hurricane, we believe rail service has remained relatively steady in the third quarter and still materially improved over 2023 levels. Average train speed at UP saw modest improvements amid a considerable intermodal volume surge, in line with commentary we heard from the Port of Los Angeles citing smooth operations and box turns at rail yards. Recovery from weather events in the second quarter proved swift at UP and we will monitor developments on the Eastern network out of Helene.
Valuation
Both UP and NS are trading above their forward five-year PE averages, while CSX is currently trading at approximately a half turn discount to its historical average. All three U.S. Class Is are trading well below their five-year highs. NS is the best U.S. performer year-to-date, though the rails have underperformed the TL group, LTL group, and the broader market this year. We are increasingly cautious on near-term mix/yield challenges for the U.S. group that may limit upside given strength in volumes QTD. Rail pricing survey outlook offers negative yield read in the second half.
