Tickers in this Article: CSX, CP, CNI, NYSE:BRK.A, UNP
If the first earnings report from the railroad sector is any indicator, there is going to be plenty of fundamental support to back up the hot stock performance of recent times. CSX (NYSE: CSX) does not have the best historical reputation, but if this company is doing well it stands to reason that this is going to be a fine quarter for this part of the transportation sector.

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The Quarter That Was
CSX reported that overall revenue rose 16% in the third quarter. Merchandise sales rose 15% (that is basically non-coal rail traffic), while coal revenue was up 23%. Carload volume increased nearly 10% this quarter (not bad), while yields were up about 6% (better!).

Interestingly, intermodal revenue was up only 6% this quarter - interesting, as that is weaker than recent rail reports have indicated for the intermodal industry. Then again, with Western Europe in something close to hibernation, perhaps CSX's East Coast exposure keeps a lid on that intermodal performance. If that is true, then Union Pacific (NYSE:UNP), Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, and the two Canadian operators (Canadian Pacific (NYSE:CP) and Canadian National (NYSE:CNI)) could be expected to do quite a bit better on that line.

As strong as the topline was, the company's profit performance was even more impressive. CSX carries the rep as one of the historically worst companies in terms of operating efficiency. Well, the improvement continues in a big way - CSX announced a 69.1% operating ratio, a 480 basis point improvement over last year's level and a 90 basis point improvement from the second quarter. That fueled a 39% increase in operating income.

The Road Ahead
It is probably fair to wonder if CSX has any levers left to pull on its operating margin - particularly if fuel prices start ratcheting higher again. Of course, that has been said before and CSX has managed to continue to improve this important metric.

Overall, the bigger concern for CSX has to be the general tenor of the manufacturing sector. If activity is slowing down, then CSX is going to be hard-pressed to maintain double-digit carload growth. Trains are clearly more efficient than trucks and perhaps there is more share to take there, but CSX can do nothing if there is simply less overall activity in the economy.

The Bottom Line
It is very early in the third quarter reporting cycle, and no major manufacturers have reported as of this writing, but it seems more probable that manufacturing is settling into a lower rate of growth as opposed to a new contraction. That should be reasonably positive news for rails like CSX - nobody could rationally expect indefinite double-digit revenue growth, so an eventual slowdown should already be in the shares.

Are CSX shares a bargain? Hard-core value investors would probably never say "yes", as railroads have exceptionally high ongoing capital maintenance needs. Nevertheless, there are not too many sectors with better earnings momentum right now, so investors more interested in the "Guh" part of GARP investing may still find stories to like in the rail sector. (For more, see Rails Roll Into The Fall.)

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