Railroads are a good recession play, making now a good time to pick up battered stocks in the sector, according to Loop Capital. The firm on Thursday upgraded shares of CSX , a railroad holding company, to buy from hold, but kept its price target of $38. Part of the reason for the upgrade is that CSX is now trading 28% below the firm’s price target, analyst Rick Paterson wrote in a note. On Thursday, shares were up more than 3% in pre-market trading. The stock is down more than 20% year to date. “CSX, and the rest of the railroads, should be good places to park some money in the event of economic softness in 2023 given they always have pricing power and have easy comps next year because of all the meltdowns this year,” he said. “We’re looking at historically low bars for operating efficiency and, as a consequence, significantly constrained 2022 volumes to match against next year.” The upgrade isn’t in response to CSX’s second-quarter earnings report Wednesday, which beat analysts’ revenue expectations, Paterson said. Nor was it triggered by management’s plan to reach a headcount of 7,000 active train and engine employees before the end of the third quarter, he said. Management expects that level of staffing will improve operating efficiency. “Getting a melted-down Class I out of the ditch is difficult, unpredictable — even for management — and requires a bit of luck,” Paterson wrote. “We hope of course that CSX is right on the timing, but we wouldn’t recommend investors buy the stock with this expectation.” He added that even if there is an inflection point in the third quarter, “it’s going to be a slow spin-up given the fact that CSX’s customers, interchange partners, and other supply chain partners would remain dysfunctional to varying degrees.” “The worst-case, but increasingly likely, scenario is that we may have to wait until the next recession before the overall supply chain can reconstitute itself to pre-pandemic levels of efficiency,” he said.
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