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?

IN PICTURES: Top 6 Most Tradable Currency Pairs

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.)

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

Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!