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Rail Traffic Points To An Ongoing Recovery
For the pessimist crowd of economists looking for a double-dip recession, rail traffic is proving to be a decidedly inconvenient truth. With November numbers in hand, it is pretty clear that the industrial sectors of the North American economy are continuing a slow (and decidedly unspectacular) recovery. Although the pace of growth is clearly moderating, traffic and utilization suggests that the major rail carriers can continue to see solid demand for the near future and that is a positive look-through for the economy as a whole.
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The Details of November
According to the Association of American Railroads' Rail Time Indicators, U.S. rail traffic grew 4.5% in November, while intermodal traffic increased 11.3%. On a sequential basis, seasonally adjusted traffic fell 1.1% from October, while intermodal was down 0.4%. It should be noted that an October-November decline is normal and completely consistent with the trend of past years. Once again, though, Canada was even stronger, as rail traffic rose more than 5% and intermodal increased 13%. (For more, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)
Once again, rail traffic performance was broad-based. Although agricultural products and auto traffic were both down, that again is normal for this time of year. In other words, there is no particular reason for investors in Ford (NYSE:F), Toyota (NYSE:TM) or Archer Daniels Midland (NYSE:ADM) to see any bad news in these numbers.
Of more interest to this analyst was the performance of coal. To give investors an idea of just how important coal is to the railroad industry, remember that coal represented 46% of total American railcar traffic in November. So while there are differences between Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX) in terms of the exact breakdown of their traffic, coal is important to everybody.
For November, coal traffic was up 2.9%, though it has been following the typical pattern of trailing off after the summer months. That plays into the overall theme of gradual economic improvement, as electricity demand is tied to economic activity and traffic has rebounded from the depths of 2009. That said, demand (in terms of weekly carloads) is still only at about 60% of the peak levels seen in 2008. (For more, see Coal Burns Bright Despite Pressures.)
Slow News is Good News?
Investors should also keep their eyes open for Grainger's (NYSE:GWW) monthly sales commentary, as this is another useful piece of data to pair with this rail traffic. Assuming Graingers' data fits the same trend, the slow recovery is still underway and that is a mixed blessing for the economy. The bad news is that growth in this recovery has not been strong enough to encourage companies to hire workers and unemployment is still at an unacceptably high level. On the other hand, this slow pace of growth has kept a lid on wages and inflation and has allowed the Fed to keep rates at very low levels.
Will Strong Utilization Lead to More Activity?
It is also worth noting that the number of railcars in storage continues to decline, with a little less than 21% of the fleet in storage on December 1, 2010. Clearly, it is hard for the major rail operators to justify buying new cars if they have plenty in storage, so this ongoing trend should be encouraging news for suppliers like FreightCar America (Nasdaq:RAIL), American Railcar (Nasdaq:ARII), Trinity (NYSE:TRN) and Berkshire Hathaway's (NYSE:BRK.A) Union Tank Car. It is not coincidental, then, that the former three names are all near 52-week highs.
The Bottom Line
Clearly, there has been solid stock momentum for the Class 1 railroads and publicly-traded short line operators this year. Moreover, economic activity has yet to reach its prior peak, so it is not unreasonable to think there is more track left for this run. That said, investors considering hopping on this late in the trip should remember that these stocks often turn in anticipation of peak activity, so buy-and-hold for the long term may be unwise at today's levels. (For more, see Top Performing Railroad Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Details of November
According to the Association of American Railroads' Rail Time Indicators, U.S. rail traffic grew 4.5% in November, while intermodal traffic increased 11.3%. On a sequential basis, seasonally adjusted traffic fell 1.1% from October, while intermodal was down 0.4%. It should be noted that an October-November decline is normal and completely consistent with the trend of past years. Once again, though, Canada was even stronger, as rail traffic rose more than 5% and intermodal increased 13%. (For more, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)
Once again, rail traffic performance was broad-based. Although agricultural products and auto traffic were both down, that again is normal for this time of year. In other words, there is no particular reason for investors in Ford (NYSE:F), Toyota (NYSE:TM) or Archer Daniels Midland (NYSE:ADM) to see any bad news in these numbers.
Of more interest to this analyst was the performance of coal. To give investors an idea of just how important coal is to the railroad industry, remember that coal represented 46% of total American railcar traffic in November. So while there are differences between Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX) in terms of the exact breakdown of their traffic, coal is important to everybody.
For November, coal traffic was up 2.9%, though it has been following the typical pattern of trailing off after the summer months. That plays into the overall theme of gradual economic improvement, as electricity demand is tied to economic activity and traffic has rebounded from the depths of 2009. That said, demand (in terms of weekly carloads) is still only at about 60% of the peak levels seen in 2008. (For more, see Coal Burns Bright Despite Pressures.)
Slow News is Good News?
Investors should also keep their eyes open for Grainger's (NYSE:GWW) monthly sales commentary, as this is another useful piece of data to pair with this rail traffic. Assuming Graingers' data fits the same trend, the slow recovery is still underway and that is a mixed blessing for the economy. The bad news is that growth in this recovery has not been strong enough to encourage companies to hire workers and unemployment is still at an unacceptably high level. On the other hand, this slow pace of growth has kept a lid on wages and inflation and has allowed the Fed to keep rates at very low levels.
Will Strong Utilization Lead to More Activity?
It is also worth noting that the number of railcars in storage continues to decline, with a little less than 21% of the fleet in storage on December 1, 2010. Clearly, it is hard for the major rail operators to justify buying new cars if they have plenty in storage, so this ongoing trend should be encouraging news for suppliers like FreightCar America (Nasdaq:RAIL), American Railcar (Nasdaq:ARII), Trinity (NYSE:TRN) and Berkshire Hathaway's (NYSE:BRK.A) Union Tank Car. It is not coincidental, then, that the former three names are all near 52-week highs.
The Bottom Line
Clearly, there has been solid stock momentum for the Class 1 railroads and publicly-traded short line operators this year. Moreover, economic activity has yet to reach its prior peak, so it is not unreasonable to think there is more track left for this run. That said, investors considering hopping on this late in the trip should remember that these stocks often turn in anticipation of peak activity, so buy-and-hold for the long term may be unwise at today's levels. (For more, see Top Performing Railroad Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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