Better Buy: Union Pacific or Norfolk Southern Stock?

A pillar of our infrastructure, the historic railroad industry remains the most eco-friendly way to transport chemicals, metal, coal, grain, and many other goods across America. 

Let's take a closer look at two major players in the railway industry and determine which railroad stock makes a better buy in today's market.

The case for Union Pacific

Union Pacific (UNP 4.99%) transports coal, agricultural goods, and freight across 23 states in the Western U.S. After posting an all-time high of nearly $280 a share last March, Union Pacific stock dropped more than 23% and is now trading at around $214.

Operating performance within the Omaha-based railway improved in third quarter of 2022, resulting in quarterly records for operating revenue, net income, and earnings per share. Thanks to higher fuel surcharges and bigger volumes, operating revenue rose 18% year over year. Total revenue-producing carloads enjoyed a 3% rise, and average maximum train length grew 1%.

Rather than celebrate its quarterly earnings-per-share record, Union Pacific reduced its full-year 2022 growth outlook to 3% from the previous 4% to 5% range, indicating that staffing issues might linger into fourth-quarter performance. 

Although volume was up, a shorthanded workforce strained Union Pacific's growth during the third quarter. Having left a substantial amount of business on the table, CEO Lance Fritz told investors in the quarterly conference call that his team is "digging out" of its crew availability problem. Also, the company's hiring initiatives and training programs have already improved staffing levels.

The case for Norfolk Southern

Norfolk Southern (NSC 1.95%) hauls America's freight throughout the Eastern U.S., delivering more than 7 million carloads a year. Its stock reached an all-time high just shy of $300 a year ago, then fell more than 14% to the $255 range. Can this transporter of coal, cars, and auto parts now push to new heights?

After breaking records for revenue, net income, and earnings per share last quarter, Norfolk Southern appears to be on the right track. With a restored workforce and improved efficiency, the Atlanta-based rail carrier thundered past analysts' estimates -- carrying in 27% more profit than Q3 of 2021. Third-quarter sales hit $3.3 billion, representing a 17% year-over-year increase, and earnings per share jumped by nearly 34%.

Amid strong performance, fears of a potential strike and scattered crew shortages curbed volume during the quarter. A 2% decline in overall volume was endured year over year, led by an alarming 14% drop in Norfolk Southern's coal shipments. 

To sum things up, even though volume was down, revenue and profits were up for Norfolk Southern. Utilizing modern technology including artificial intelligence and machine learning, the modern railway works to not only reduce its impact on the environment but also optimize operations substantially. Company initiatives such as improved fuel economy and waste recycling have both cut costs and helped Norfolk Southern's sustainability efforts.

Which railroad stock is the better buy?

To determine whether Union Pacific or Norfolk Southern makes a better buy in today's market, let's compare their price-to-book ratios and five-year growth estimates. 

Data source: Yahoo! Finance.

Since both companies' five-year growth estimates are nearly identical, a much lower price-to-book ratio determines Norfolk Southern to be today's winner. However, both railway companies appear to have a bright future ahead, provided they continue to weather the storm -- as they have for centuries.