By Paul R. La Monica

President Donald Trump's threats to impose tariffs on Canada and Mexico could be a big problem for U.S. railroad operators that do a lot of business with America's neighbors.

But so far this year, investors are shrugging it off: They're all aboard when it comes to railroad stocks.

Shares of Union Pacific, Norfolk Southern, and Canadian Pacific Kansas City are all up more than 10% this year despite worries about tariffs. (Canadian Pacific Kansas City is based in Calgary but bought U.S. railroad Kansas City Southern in 2023.)

CSX, up just 2%, is the laggard in the industry. And Warren Buffett's Berkshire Hathaway, which owns the BNSF Railway, is up 4%, too, but the Oracle of Omaha's conglomerate is obviously much more than a transportation company.

Tariffs could slow the flow of goods being transported to the U.S. from Canada and Mexico, leading to a reduction in volume and lower revenue and profits for railroad operators.

Are investors being overly dismissive of concerns about a Trump trade tiff with Mexico and Canada? Perhaps.

But Union Pacific CEO Jim Vena said in the company's fourth quarter earnings conference call with analysts this month that he wasn't too worried about all the tariff talk. His take was that other potential policies from Trump and Congress -- such as deregulation and lower taxes -- would be good for the company and economy.

"I look at the entire package. If we get tariffs, but we also get the regulatory changes and we get the tax changes that were talked about by the president, with how depreciation is going to work on capital and how our corporate tax rate works, that could be...positive," Vena said.

"I'm hoping that it's a negotiating position by the president," since U.S. consumers would be hurt by any increase in prices, he added.

Canadian Pacific Kansas City Southern, which potentially has even more to lose if Trump imposes higher tariffs on Canada, didn't seem too nervous either. After all, the company (and industry for that matter) has seen this before with Trump's tariffs during his first term. Trump imposed tariffs on steel and aluminum from Canada and Mexico in 2018.

"Frankly, if you look back to 2018 and 2019 during the last set of tariffs, I think the reality was that these supply chains are very complex," said Canadian Pacific Kansas City chief marketing officer John Brooks during a conference call with analyst this week following its earnings.

"It's commodity-by-commodity, it's lane-by-lane, it's customer-by-customer," Brooks added. "What we saw is there wasn't a lot of change. It's hard to change these complexities overnight."

Wall Street doesn't seem overly concerned either. In fact, any tariff-related selloffs could mean a good bargain for investors.

"We still expect a relatively muted outcome when the dust ultimately settles between the U.S., Canada and Mexico and as a result would use any near-term volatility as a potential buying opportunity," said J.P. Morgan analyst Brian Ossenbeck in a report about Canadian Pacific Kansas City this week.

Daniel Imbro, an analyst with Stephens, added in an email to Barron's that he isn't too concerned about tariffs on Canada and Mexico because "we don't think these would make a lot of sense."

Imbro pointed out that many automotive supplies are transported from Mexico via train that "cannot be made here in the U.S., and [are] critical for domestic manufacturing jobs." Imbro added that oil and grain tend to be the biggest imports from Canada and that there isn't enough domestic production of those commodities to meet demand.

"We still think these goods would need to move by rail," he explained.

The four major railroads don't look particularly expensive either, trading in a range of 16 to 21 times earnings estimates for 2025. What's more, this quartet of stocks are all valued slightly below their 5-year average forward price-to-earnings ratios.

Analysts are also forecasting that earnings growth for the next few years for CSX, Canadian Pacific Kansas City, Norfolk Southern, and Union Pacific will grow about 8% to 12% annually over the next few years.

This combination of reasonable prices and steady momentum should provide a solid foundation for the industry.

So while investors should be aware that tariff headlines may cause some volatility and potential pullbacks for these stocks in the short-term, the railroads likely can keep chugging along.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 30, 2025 13:47 ET (18:47 GMT)

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