Want to know about some stocks that are not only apt to ace Q2, but also knock one out of the park in Q3? If the economy really is slowing down again, somebody forgot to tell the railroads that - they're still shipping as much as they have been since the end of Q1.

IN PICTURES: Obtaining Credit In A Bad Economy

Take a look at last quarter's earnings results so far, and more importantly, take a look at how the same conditions that drove those numbers have bled into the third quarter without a moment's hesitation.

Two for Two
Union Pacific (NYSE:UNP) got the ball rolling on Thursday morning, announcing record-breaking earnings of $1.40 per share, and topping Wall Street's estimate of $1.21. Frankly though, that's not even the compelling part of the picture. The railroad also reported that all six of its business segments (automotive, intermodal, chemicals, etc.) increased revenue as well as earnings.

Canadian National Railway (NYSE:CNI) followed that lead, posting a 38% improvement (year over year) last quarter with a per-share profit of $1.13. Analysts were only expecting 99 cents. In fact, the numbers were so strong, Canadian National raised its full-year earnings guidance to 25% better than last year's.

And let's not forget that CSX Corp. (NYSE:CSX) nailed last quarter's earnings as well, bringing home $1.07 per share versus an anticipated 98 cents. Revenue was up 22%, while shipping volume was up 13%.

But what about the possibility that the slowdown actually occurred during the second quarter - say June - which isn't reflected in the total Q2 earnings numbers?

I considered that possibility. So, rather than making assumptions, I went straight to the source to look at weekly rail traffic numbers since the end of Q1 through last week. You know what? Total rail shipping hasn't secretly slowed on the last six weeks. Weekly ton miles (train-car units times distance traveled) are still holding between 30 and 32 billion per week, as they did every week in March, April, May and June. So no, demand hasn't started to wane in the meantime. Most of these companies also confirmed that even though the year-over-year growth rates may taper off, demand isn't expected to wither anytime soon,

The picture is clear - this industry is a freight train you don't want to step in front of.

Not All Rail Freight Is Built the Same
While it would be easy to stand back and say "buy railroad stocks because rail demand remains firm", that would also omit an important detail about how you select one of these stocks. In fact, it may even prompt you to look at transportation stocks that aren't rail names.

We've seen this trend developing for a long time, but it ramped up its pace last month. Intermodal traffic (shipments of goods in giant cargo containers that are just hoisted off a train car and onto a flatbed truck trailer, and vice versa) in June of 2010 totaled an average of 220,000 per week. That was not only about 19% higher than intermodal numbers from the same quarter a year ago, but even higher than May 2010 totals.

And since trucks are needed to carry intermodal cargo to and from the trains to wherever it comes from or ultimately goes to, it stands to reason that intermodal truckers are also enjoying some growth.

Sure enough, when J.B. Hunt (Nasdaq:JBHT) posted earnings of 40 cents per share last week, versus last year's 24 cents, intermodal business was cited as one of the big reasons for the improvement, and that was despite a slight decline in intermodal pricing. Intermodal revenue was higher by 24% on a 19% increase in volume.

Not Just Intermodal Though
With all that being said, don't blindly assume that future growth in the trucking business will depend on intermodal's proliferation - all trucking categories are showing spending and volume improvements, month by month, through June. In fact, the Cass Report says shipping expenditures and shipping volume are actually back to late-2008 levels, and still swelling.

That's probably why Werner Enterprises (NASDAQ:WERN) posted a 65% increase in last quarter's earnings, while Knight Transportation (NYSE:KNX) drove a 26% increase in last quarter's earnings.

The Bottom Line
Despite the chatter, shipping demand isn't drying up, at least not here in the United States. (Learn how shipping indicators can help you determine the direction of the economy in The Baltic Dry Index: Evaluating An Economic Recovery.)

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Tickers in this Article: UNP, CSX, CNI, JBHT, WERN, KNX

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