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The Railroads In 2010
The railroad industry in 2010 will see stock prices buoyed by an anticipated recovery in the economy in the United States, good operating leverage due to cost cutting and investor enthusiasm over recent sector acquisition activity.
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Investors who subscribe to the "smart money" theory of investing, whereby the investment strategy consists of mimicking the activities of well-known and successful investors, should get their checkbooks out for the railroad sector in 2010. The group was empowered by Berkshire Hathaway's (NYSE:BRK.A, NYSE:BRK.B) recent purchase of Burlington Northern (NYSE:BNI) in late 2009.
Fundamentals
Fundamentals in the railroad industry are still not good, as the economy remains weak. The Association of American Railroads reported that freight railroad carloads for the week ending December 12, 2009, were down by 10.2% over the same week last year. Year to date through 49 weeks in 2009, railroad carload volumes are down by 16.8% from last year.
There was no place or category of goods to hide in 2009. The worst hit volumes were in metallic ores, which has seen carloads hauled fall by 52% year to date in 2009 over last year. Coal carloads, which is one of the largest businesses for the railroads fell by 10.8%.
Regulatory Risk
The industry will also have to deal with new legislation from Congress that will regulate shipping rates that the railroads charge its customers. The proposed law is not finalized yet, but the industry did manage to remove a section that might have stripped the industry of its current exemption from antitrust laws.
Despite these weak fundamentals, some of the railroads are expecting pricing power in 2010. Union Pacific (NYSE:UNP) is estimating 5% pricing gains in 2010, dependent on an improving economy.
Cost Cutting
The railroad industry, like all other businesses in the U.S., cut costs drastically in 2009. CSX (NYSE:CSX) cut its operating expenses by 23% through the first nine months of 2009 compared to 2008. The drop in fuel costs played a large role in this but even after normalizing for changes here, expenses fell by 16%.
Green Benefits
Some railroads are playing up the environmental benefits of the railroads relative to other modes of transportation in 2010. Norfolk Southern Corporation (NYSE:NSC) released a calculation of its carbon footprint in late 2009, and boasted that the greenhouse gas emissions per revenue ton-mile were only one ounce, or the "weight of a slice of bread."
Intermodal Growth
The railroad industry is also investing in capacity that will enable intermodal growth, which refers to the transport of finished goods in a containerized vessel across different modes of transport. Railroads are seeking to increase shares as companies worry that diesel prices will soar again in 2010.
Norfolk Southern Corporation recently signed an agreement with JB Hunt Transport Services (Nasdaq:JBHT) that would allow the two companies "to accelerate the conversion of traditional truck traffic to cost effective, environmentally friendly intermodal transportation."
The Bottom Line
The railroad industry is anticipating a good 2010, but like virtually every other sector, this rebound is based on an economy getting better. This is a bet that some might not want to take given the strong move up in stock prices in 2009. (For more, read The Importance Of Diversification.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Learn To Invest In 10 Steps
Investors who subscribe to the "smart money" theory of investing, whereby the investment strategy consists of mimicking the activities of well-known and successful investors, should get their checkbooks out for the railroad sector in 2010. The group was empowered by Berkshire Hathaway's (NYSE:BRK.A, NYSE:BRK.B) recent purchase of Burlington Northern (NYSE:BNI) in late 2009.
Fundamentals
Fundamentals in the railroad industry are still not good, as the economy remains weak. The Association of American Railroads reported that freight railroad carloads for the week ending December 12, 2009, were down by 10.2% over the same week last year. Year to date through 49 weeks in 2009, railroad carload volumes are down by 16.8% from last year.
There was no place or category of goods to hide in 2009. The worst hit volumes were in metallic ores, which has seen carloads hauled fall by 52% year to date in 2009 over last year. Coal carloads, which is one of the largest businesses for the railroads fell by 10.8%.
Regulatory Risk
The industry will also have to deal with new legislation from Congress that will regulate shipping rates that the railroads charge its customers. The proposed law is not finalized yet, but the industry did manage to remove a section that might have stripped the industry of its current exemption from antitrust laws.
Cost Cutting
The railroad industry, like all other businesses in the U.S., cut costs drastically in 2009. CSX (NYSE:CSX) cut its operating expenses by 23% through the first nine months of 2009 compared to 2008. The drop in fuel costs played a large role in this but even after normalizing for changes here, expenses fell by 16%.
Green Benefits
Some railroads are playing up the environmental benefits of the railroads relative to other modes of transportation in 2010. Norfolk Southern Corporation (NYSE:NSC) released a calculation of its carbon footprint in late 2009, and boasted that the greenhouse gas emissions per revenue ton-mile were only one ounce, or the "weight of a slice of bread."
Intermodal Growth
The railroad industry is also investing in capacity that will enable intermodal growth, which refers to the transport of finished goods in a containerized vessel across different modes of transport. Railroads are seeking to increase shares as companies worry that diesel prices will soar again in 2010.
Norfolk Southern Corporation recently signed an agreement with JB Hunt Transport Services (Nasdaq:JBHT) that would allow the two companies "to accelerate the conversion of traditional truck traffic to cost effective, environmentally friendly intermodal transportation."
The Bottom Line
The railroad industry is anticipating a good 2010, but like virtually every other sector, this rebound is based on an economy getting better. This is a bet that some might not want to take given the strong move up in stock prices in 2009. (For more, read The Importance Of Diversification.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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