Tickers in this Article: CSX, NSC, UNP, BRK.A, VMC, OLN, ACI
For a few months now, I have had a standard response to the skeptics of the economic recovery, and it goes something like this. "If the recovery is not real, and if the recovery is stalling out, why are the railroad shipments still strong?" That point was driven home again with strong results from Eastern railroad operator CSX (NYSE:CSX).

IN PICTURES: 20 Tools For Building Up Your Portfolio

The Quarter That Was
By virtually any metric, CSX had a very strong quarter. Revenue was up 22% over last year, as both volume and pricing were strong. Volume (as measured by carloads) climbed about 13% from last year, while pricing (revenue per carload) rose about 8% over the same time period. Revenue of $2.7 billion exceeded the average estimate, which makes the source of the surprise pretty apparent - since the company reports intra-quarter volumes frequently, it was the pricing that was the strongest surprise.

CSX's results gained strength on down through the income statement. Reported earnings jumped 36%, while profits from continuing operations jumped 47%. The operating ratio also improved; the reported number of 71.2%. Assuming that is accurate, that is not only a 340 basis point improvement from last year, but I believe it is the best level the company has posted since the 1999 split-up of Conrail with Norfolk Southern (NYSE:NSC). That is an impressive sign of improvement in a metric where CSX has long been a laggard. (For more, see Ratio Analysis Tutorial.)

The Details Hold Up
Looking deeper into the details of this quarter, the picture just continues to look good. Carloads were up across the board; coal loads were up 7%, intermodal volume was up 18%, and merchandise volume was up 14%. System-wide velocity was down a bit (which is a negative), but dwell times were also down and that helped offset it.

Going deeper into the carload detail, I am surprised to see that every category showed growth. Agricultural shipments were the weakest, with 1% growth, and automotive shipments were the strongest (at 63% growth) as that sector recovers from an usually low bottom. Going on, chemical shipments were up 10% and even aggregates and forest products were up (7% and 2%, respectively).

What Is The Read-Through?
Given the commentary of CSX management around this quarter, there is no reason to expect any short-term fall off in volumes. Demand for carriage continues to grow with the economic recovery, and it is strong enough that the rails are continuing to push price increases through to customers. That has to be seen as a positive for other operators like Union Pacific (NYSE:UNP), Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, and especially for CSX's Eastern brother Norfolk Southern.

For the customers, too, though, I have to see these results as encouraging. Basic material stocks have been soft, whether it is aggregate company Vulcan Materials (NYSE:VMC), chemical company Olin (NYSE:OLN), or coal company Arch Coal (NYSE:ACI). Interesting, then, that the stocks are still soft even though the shipment volumes are solid and railroad managers are confident in the near-term outlook. That suggests that investors should check out these sectors on the idea that the recovery may be a little more durable than commonly thought.

The Bottom Line
Should you buy a railroad stock? If you are a dyed-in-the-wool free cash flow fan, the answer is almost certainly "no". But then, it is rare for these stocks to ever show up as good values according to these models and yet the stocks can still perform quite well in the early phases of a recovery.

CSX's stock has jumped nicely from the early-2009 low, but has mostly plateaued recently. Again, that is not shocking given the prevalence of doubt about the recovery and it bears mentioning that railroad executives are not historically great forecasters of future demand. Nevertheless, if you believe the recovery will continue and rail volumes will continue to grow towards their pre-recession levels, there is likely still more room for these stocks to roll. (For related reading, see Rails Show Strength.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center