Citi shuffles transportation stock ratings after post-election sector rally

Investing.com -- Analysts at Citi revised their transportation stock ratings on Tuesday, citing valuation concerns that emerged following a post-election rally in the sector.

The Wall Street firm downgraded truckload carriers Knight-Swift Transportation (NYSE:KNX) and Schneider National (NYSE:SNDR) to 'Sell'.

The downgrades come in the wake of a strong performance in the broader transportation sector, with the NASDAQ Transportation Index rising notably since early October. The index jumped more than 10% in the past month, compared to a 2.4% gain in the S&P 500 during the same period.

The surge in valuations came despite third-quarter earnings being mixed and fourth-quarter outlooks generally cautious.

According to Citi analysts, most of their US coverage has seen positive movement, with the exception of two Canadian stocks – Canadian Pacific (NYSE:CP) Kansas City and Canadian National Railway (TSX:CNR) Co (NYSE:CNI).

“As we survey the landscape, we now worry that investors are chasing stocks that have already risen considerably, with companies having to significantly outperform estimates to justify current valuations,” analysts led by Ariel Rosa noted.

Specifically, analysts pointed to comments from Knight-Swift's CEO Adam Miller, who remarked that while “the worst is behind us” he does not expect a “real sharp inflection, [but rather] somewhat of a grind upwards”.

With third-quarter earnings per share (EPS) down year-over-year and valuations at their highest in over a decade, they see the potential for significant contraction in multiples, which could diminish the anticipated earnings growth upside.

On the other hand, Citi upgraded C.H. Robinson Worldwide (NASDAQ:CHRW) and CNI, focusing on value and quality with more conservative expectations.

CNI's robust network and projected high-single-digit EPS compound annual growth rate through 2027 make it a favorable pick for Citi. Meanwhile, CH Robinson's recent efficiency improvements also position it for accelerated earnings growth if the market turns as bullish as anticipated.

Lastly, analysts also shifted their stance on RXO Inc (NYSE:RXO) from Buy to Neutral, saying they are adopting a wait-and-see approach regarding the synergies from RXO's acquisition of Coyote Logistics, given the stock's performance since its initiation and a disappointing fourth-quarter outlook with several challenges. Citi will be looking for evidence of these synergies before revisiting its rating again.