Hot Picks: Analyst sees opportunity in transportation stocks as efficiency improves

Transportation stocks are showing renewed value potential as companies focus on cutting costs and improving margins. Despite tariff challenges and weak freight demand, analysts see progress on efficiency, free cash flow and dividend sustainability.

BNN Bloomberg spoke with Ari Rosa, analyst at Citi, about his top picks in the transportation sector, including United Parcel Service, Union Pacific and Knight-Swift Transportation. He says the group is benefiting from cost-cutting, strong execution and tightening capacity across freight networks.

Key Takeaways

• UPS’s better-than-expected earnings and cost-cutting efforts support its dividend yield and cash flow recovery.
• Union Pacific’s merger proposal with Norfolk Southern offers long-term upside as it trades at low valuations.
• Knight-Swift Transportation is positioned to benefit from tightening trucking capacity and improving freight rates.
• CN Rail’s cost reductions and share buybacks are boosting investor sentiment and free cash flow outlook.
• Analysts see efficiency and valuation tailwinds across the transport sector heading into 2026.

Read the full transcript below:

ANDREW: Time for Hot Picks. We’re focusing on the transport sector. UPS has been hit hard by tariffs, but our guest has it as a top pick. He says he’s encouraged by margin improvement as UPS works to make its operations more efficient. We’re joined by Ari Rosa, analyst at Citi. Ari, great to see you. Thanks very much indeed. Give us your thesis on United Parcel Service, please.

ARI: Yes, thank you for inviting me on. It’s interesting — UPS has been out of favour all year. In fact, more than all year; it’s been out of favour for a couple of years now. And frankly, the stock is down a lot, and we see this really as a value play. They reported earnings this week that were better than expected. They’re getting more aggressive in terms of cost-cutting actions, and I think that’s really where our confidence comes from.

This is a stock that now has one of the highest dividend yields in the S&P 500, so any income-oriented investor should like this. They’re clearly indicating that free cash flow is expected to be better over the next year. There’s not a lot of downside risk and quite a lot of upside if they can gain traction with these cost-cutting programs. There’s further upside, of course, on a macro inflection. The economy has been weak, but we see some reasons for optimism in the year ahead.

ANDREW: That’s interesting. The yield has now gone to about 6.9 per cent, and I know these things are very hard to predict. Is there any risk they might cut it?

ARI: Yeah, so that was actually the question I asked management on the earnings call. It was really targeted at their free cash flow. What they said is they’re expecting a step up in free cash flow. I think what got a lot of people nervous was last quarter, because of some of the tariff disruptions, their free cash flow got hit kind of hard, and there started to creep in some of these questions about the sustainability of the dividend.

But I think they did a lot this quarter to assuage those fears. They also guided to next quarter having strong free cash flow. So we’re looking at a better trajectory there. As they deliver on a couple of these quarters, that should put some of those fears to rest. We feel good about the dividend. We think it’s not only fairly safe but very safe.

ANDREW: Union Pacific — you like the look of this one. Tell us why.

ARI: Yeah, so Union Pacific is a complicated story because they’re in the process of trying to create this transcontinental railroad. They’ve proposed a merger with Norfolk Southern, which is one of the two big eastern railroads. It’s going to be a lengthy regulatory process.

What we like about Union Pacific is that the stock isn’t particularly expensive. This is a very high-quality business. Longer term, it’s attractive, and a lot of that upside is contingent on the merger going through. In the near term — similar to UPS — this is a stock that’s been a little beaten up and hasn’t really participated in the broader market rally. It now offers some of its cheapest valuation metrics in years.

For people looking for a high-quality business without as many disruptive impacts, this is a really nice option.

ANDREW: Do you think America will allow another big rail merger, or would there just be too much political pushback?

ARI: That is the $100 million question, and that’s what everyone’s trying to figure out. There are powerful arguments on both sides. It’s interesting because we heard from Canadian Pacific yesterday and from Canadian National this morning — both have been vociferously opposed to the merger. Of course, they would be, because it threatens to upset the competitive balance in the North American rail network.

And yet, President Trump has expressed support for the idea. There are a lot of efficiency benefits — or at least potential benefits — and while that remains to be seen, many people are confident that efficiency gains could be delivered by a transcontinental merger. We’ve said it’s better than a 50/50 chance. The real question is: what regulatory constraints will be imposed on the merger, and will those be sufficient to sustain competitive balance between the railroads?

ANDREW: And finally, give us your thesis on Knight-Swift Transportation.

ARI: KNX — Knight-Swift is one of the largest trucking companies in North America. It’s been out of favour, much like the rest of transports, but a lot of these asset-based carriers have been struggling under the pressure of excess capacity. They’re starting to see some tailwinds from government enforcement actions focused on restricting issuance of commercial driver’s licences to non-domiciled individuals.

That looks like it will tighten capacity. You’ve also seen Class 8 truck orders — those are the big trucks you see on the highway — start to come down quite a lot, and that usually precedes an uptick in freight rates. That sets up Knight-Swift for a really positive 2026 and 2027. Not to say we’re totally out of the woods yet, but the stock — similar to UPS and Union Pacific — has been beaten up, so we see real value here.

ANDREW: Before we let you go, Ari, we need a few seconds on CN Rail. What were your thoughts on those numbers?

ARI: CN clearly executed well. I think CN has probably been one of the more hated names in our coverage, and they came out this morning and acknowledged that the volume environment hasn’t been as supportive as they expected. They’re responding by cutting costs and focusing more on shareholder returns.

What did they do? They upped their buyback and said they’re going to cut capital expenditures, which should support free cash flow. You’re getting a nice reaction in the stock today, and we think there’s room for that to continue.

ANDREW: Thank you very much, Ari. Really appreciate it. Ari Rosa, analyst at Citi.

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This BNN Bloomberg summary and transcript of the Oct. 31, 2025 interview with Ari Rosa are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.