Citi upgrades U.S. rails as transport fundamentals are running near lows

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They told investors in a research note that they believe transport fundamentals are running at/near lows for this cycle, and a second-derivative improvement in 2H23 will be a catalyst.

The analysts also lifted the price target for each stock:

“Our call is predicated on unsustainably low spot rates in TL, which are currently below operating costs, driving capacity out of the market, which should couple with a degree of consumer demand normalization in 2H23/1H24,” explained the analysts.

“With U.S. rails more focused on volume growth (particularly Intermodal), we think the group is more closely tied to changes in the truck market than previous cycles, thus our call to pull them forward into the early cycle trade.”

The Citi analysts said they see an upside to valuation and stock prices as the 2024 recovery story builds.