Rails Show Strength

By Greg Sushinsky | July 05, 2010 AAA

Despite all the doomsday news in the economy, the railroad industry continues to show increasing strength. As an important reflector of the economy, the rails show that there are growing pockets of better performing industries. Will this strength continue to grow?

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A Continuing Trend
The rails carry freight such as coal, agricultural products, steel and other industrial materials, for nearly every industry from farming to autos. While the rails suffered as the economy did in the deep recession, the industry has been slowly coming back. After the dismal years of 2008 and 2009, rail traffic has been slowly improving. Figures for this year show that week-over-week, from the 17th week of the year measuring back to the 14th week, rail traffic increased by nearly 15% and as much as 17% sequentially each week. The traffic volume pickup along with new cost efficiencies for many of the operators are promising industry fundamentals.

Commodities Ride Here
On a year-over-year basis, freight volume is up a total of 7.2%. May figures were up 16% from a year ago May 2009. Coal, which makes up 44% of all freight, was up 6.8% in May compared to May 2009. Food and agricultural products were also up, while ore shipments skyrocketed up 120% over May 2009.

Which Rails?
CSX Corp
. (NYSE:CSX) has implemented cost controls which have helped boost its operations. Its significant cost-cutting should pay off even more in the future. Watch for its quarterly earnings report on July 12, when it's expected to report earnings per share of 94 cents for the quarter - a 31% gain from last year's mark. Although Canadian National Railway (NYSE:CNI) also struggled in 2008 and 2009, it's getting back on track toward better earnings, even though the near term may be slow. Canadian National also has great track coverage in both Canada and the U.S., ranging from Canada to the Atlantic and in the U.S. all the way down to the Gulf of Mexico. This company has been a powerhouse railroad and will perform even better as the economy improves.

Norfolk Southern (NYSE:NSC) has had sluggish earnings, but it is a solid company for the longer term. Norfolk Southern really got whacked during the recession, as annual EPS declined from $4.58 to $2.80 from 2008 to 2009. Its expected to show a good quarter when it reports at the end of July. The railroad is expanding its line in its Southern Ohio-Kentucky corridor, using a mix of its own capital spending as well as a combination of grants.

Growing Health Of Rails
Another sign of growing health of the rails, or at least growing confidence, is the Union-Pacific's (NYSE:UNP) recent dividend increase. And don't overlook smaller operator Kansas City Southern (NYSE:KSU), which has improved its capital structure, as well as its prospects for double-digit growth in 2010 via increased freight volume and revenue. All the rails aren't running strong, however, as Rail America (NYSE:RA) is still struggling on the heels of losses and isn't expected to show earnings growth again for a couple of quarters.

Cautions At The Crossings
The picture is looking up for the rails. The economy in general is not showing this kind of health across the board. Freight volume is not back to pre-recession levels.With the possibility of further leveling of the initial gains as the economy emerges from recession, the renewed health of the rail industry can be jeopardized.

So there are real cautions. Still, despite oil disasters, Chinese cutbacks, the falling Euro and continued weakness in many economic sectors, the rails forge ahead. Watch their progress and pick carefully not just among the companies but also the stocks with attractive, corrected prices. (Learn about one of the great builders in The Giants Of Finance: Andrew Carnegie.)

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