What factors can affect railroad stock prices?


Quick Answer

The factors that can affect railroad stock prices include cyclical fluctuations in demand, railroads’ access to capital at acceptable prices, labor costs and fuel costs, reports Investopedia. In addition, because railroads maintain consistently high levels of capital expenditure, traditional models for evaluating the stock price may produce inaccurate results.

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Full Answer

Since railroads have high ongoing expenses related to labor, fuel and capital, high prices of any of these reduce railroad profitability, explains Investopedia. Unions have a significant presence in the railroad sector and, for most railroads, the total expenditure on employee compensation and benefits is more than 33 percent of operating expenses. Although railroads partially mitigate high fuel costs, because rail transport is more fuel efficient than road transport, any significant shift in price strongly affects total expenses since fuel expenses may reach a fifth of total operating expenses. Also, due to the expense of maintaining the rail network, locomotives and infrastructure, the capital expenditure of the railroad sector is higher than that of many other sectors.

Since railroads provide passenger and transport services, their activity and profitability is highly sensitive to the rest of the economy, Investopedia notes. One consequence of this is that railroads face limited options for increasing demand. Because of the strong tendency of railroad stock prices to fall in a downturn, they are an attractive choice for investors looking for quality stocks at a favorable price.

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