Railroads Chug Along This Holiday Season as Risk of Strike Eases

by Trefis Team
-16.82%
Downside
105
Market
87.56
Trefis
UNP
Union Pacific Corporation
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Two more unions have settled contract terms with the railroads, bringing the total to 12 unions to have struck a consensus with the rail carriers. [1] [2] The only one remaining, The Brotherhood of Maintenance of Way Employees, intends to carry on the negotiations till February next year without going on a strike during that period. The Presidential Emergency Board early last month had provided a 30-day settlement window to 30 railroads, including Union Pacific Corporation (NYSE:UNP), Norfolk Southern Corporation (NYSE:NSC), and CSX Corporation (NYSE:CSX), and 13 unions representing 132,000 workers to resolve the wage dispute. Both parties are free to exercise ‘self-help’ after December 6, which could mean a strike by the workers or a lockout by the freight carriers.

The settlement brings relief as a day’s strike during the on-going holiday shopping period would have been critical to the retailers and could have cost the economy billions of dollars.

See our full analysis of UNP’s stock here | NSC’s stock here

Congress Prepared to Step-in

Lawmakers were planning to intercede to prevent the possibility of a strike as several industry groups, including National Retail Federation and Alliance of Automobile Manufacturers, pursued the Congress to take action. [3] Extension of the December 6 deadline, the acceleration of the settlement process, or application of PEB’s recommendations were among the likely options for the policymakers. [4] Locomotive engineers and dispatchers have reached tentative agreements with the freight carriers while maintenance workers plan to extend talks for another two months, negotiating the increased healthcare costs. A strike by even a single union would have made railroad operations unfeasible.

Holiday Sales to Drive Railroad Volume This Quarter

Taking account of the significance of the holiday shopping season for rail companies’ revenues and earnings, as they carry huge volumes of freight across the country to fulfill the orders, it was pertinent that the strike be prevented. This year the shopping season seems to be off to a good start with retail sales up 16% during the ‘Thanksgiving weekend’ compared to last year. [5] The sales data met analysts’ expectations, though there may be some concern regarding the sustainability of high promotional discounts offered by the retailers, whose same store sales did not show significant improvement over the last year. [6]

We have a price estimate of $110 for UNP, implying around 5% premium to the current market price.

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Notes:
  1. Unions Avoid Rail Strike After Congress Prepares to Intervene, Bloomberg []
  2. Agreements lift threat of immediate U.S. rail strike, Reuters []
  3. Railroads Eye Extension to Deter Holiday Strike, Investor’s Business Daily []
  4. Averting Rail Strike Is Goal of Republican, Democrat Lawmakers, Bloomberg []
  5. Thanksgiving Sales Set Record as Shoppers With Jobs Chase Bargains: Retail, Bloomberg []
  6. U.S. Retailers Meet Forecasts, New York Times []
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