RBC Capital Markets is betting that North America's biggest railroads are about to deliver stronger-than-expected second-quarter results, as a pickup in freight volumes starts to flow through to the bottom line.
In a research note published this week, the Canadian investment bank said Canadian National Railway (CN), CSX, and Union Pacific all have a better-than-average chance of beating Wall Street's earnings estimates when they report later this month. The call is based on improving shipping demand and the industry's high operating leverage, which means even modest volume gains can translate into outsized profit growth.
What's driving the optimism
RBC pointed to stronger freight demand as the main tailwind, noting that Canadian National's year-to-date volumes are up 3.6% compared with the same period last year. That may not sound dramatic, but in the railroad business, it matters a lot.
Railroads have high fixed costs — things like crew wages, locomotive maintenance, track access fees, and terminal operations don't change much whether a train carries 100 cars or 110. So when volume ticks up, revenue grows faster than expenses, and profit margins can expand quickly. That dynamic is known as operating leverage, and it's why analysts watch volume trends so closely.
RBC modeled second-quarter earnings per share of $1.95 for Canadian National, $0.51 for CSX, and $3.28 for Union Pacific. The bank argues those estimates leave room for upside versus the consensus forecasts already priced in by the broader market.
Reporting calendar sets the stage
The timing of earnings reports could amplify the market reaction. CSX is scheduled to report on July 22, followed by Canadian National on July 24. That gives investors an early read on whether higher volumes are actually turning into higher profits, and could reset expectations for the rest of the sector.
RBC also raised its price targets for Canadian National and CSX, signaling confidence that the earnings beats, if they materialize, will be rewarded by the market. The bank took a more cautious stance on Canadian Pacific Kansas City, citing recent derailments and higher share-based compensation costs that could weigh on results.
Norfolk Southern was treated as a special case. RBC noted that its potential merger with Union Pacific faces extra regulatory scrutiny, which can overshadow the usual earnings narrative and make the stock harder to handicap in the near term.
What it means for investors
For everyday investors, the key takeaway is that railroad stocks are sensitive to the direction of freight volumes, and the current trend is positive. When volumes inflect upward, earnings can surprise to the upside, and analyst estimates often get revised higher in the weeks that follow.
That pattern has played out before. In past cycles, a 3-4% volume gain has been enough to trigger meaningful earnings beats across the sector, especially when combined with cost discipline and pricing power. RBC's note suggests this quarter could be another example.
Investors should also watch for commentary on pricing, fuel costs, and labor expenses when the railroads report. Those factors can either amplify or offset the benefit of higher volumes. But for now, the volume picture is the brightest it has been in several quarters.
For context, the broader economy has shown mixed signals recently. While some sectors like energy have seen volatility — oil prices fell 4% recently, easing some cost pressures for transport companies — the industrial and freight side of the economy appears to be stabilizing. That bodes well for railroads, which are often seen as a bellwether for economic activity.
RBC's call also comes amid a busy period for corporate earnings across sectors. Evertz Technologies recently beat Q4 estimates, showing that company-specific factors can still drive surprises even in a mixed macro environment. But railroads, with their high operating leverage, offer a more direct play on the volume cycle.
The bottom line
RBC's analysis suggests that the second-quarter earnings season could be a positive one for railroad investors, especially those holding Canadian National, CSX, or Union Pacific. The combination of improving volumes and high operating leverage creates the potential for earnings beats that go beyond what the consensus expects.
With CSX and Canadian National reporting within days of each other, the market will get a quick read on whether the thesis holds. If it does, the rest of the sector could follow suit, and analyst estimate revisions could provide further support for stock prices in the months ahead.
