Shares of Union Pacific Corp. sank 1.6% and Norfolk Southern Corp. dropped 0.8% in midday trading Tuesday, after JPMorgan analyst Brian Ossenbeck downgraded both railroad operators to neutral from overweight, citing lower earnings expectations due to persistently weak operations and lower economic forecasts. Ossenbeck said that although the stocks’ risk-versus-reward profiles appears balanced given that prices have already dropped from peak valuations levels in late March, the selloffs have not yet priced in the full impact of a potential freight recession, and the consensus analyst earnings estimates actually went up since the first quarter. Union Pacific shares have slumped 15.8% over the past three months and Norfolk shares have shed 13.5%, while the Dow Jones Transportation Average has declined 8.3% and the Dow Jones Industrial Average has given up 8.5%. Ossenbeck said he was “increasingly cautious” on the U.S. rails’ ability to hire and retain sufficient labor, and because they are also likely to be slow to adjust headcount lower if economic conditions deteriorate.
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