There is an interesting set-up in the transportation sector right now. The Dow Jones Transports Index is near a 52-week high, but it looks like momentum in the rail sector may be slowing. One month certainly proves nothing, but if traffic volume is stagnating that could mean that the end of robust revenue growth in the industrial sector and a transition to the next phase of the economic cycle.

TUTORIAL: The Industry Handbook

A Tough April for King Coal
According to Rail Time Indicators, a monthly publication of the Association of American Railroads, U.S. rail traffic slipped 0.2% from the year-ago level in April and 2.5% on a sequential basis - the first year-on-year decline in over twelve months. Intermodal traffic was stronger though, growing 9% annually and 1.2% sequentially. (For more, see Rail Traffic Suggests A Slower Pace.)

At over 40% of all carload traffic, as coal goes, so goes the rail sector and April was a tough month for coal shipments. Coal traffic declined 2.9% from last year, but this number merits a little more investigation. Back in 2010, the April carload figure for coal surged more than 7% as utilities looked to rebuild coal stockpiles that had been run down during the recession. Consequently, it was a very difficult comparison.

Unfortunately, it is difficult to compare this data to coal stocks at power plants on a real-time basis as the there are delays in data collection and reporting from the Department of Energy. Coal consumption had dropped pretty sharply at the start of the year, even though coal stockpiles were declining slightly.

Other Sectors Still Coming Through
Moving on from coal, it looks like a more normal mix of traffic data. Grain traffic was very strong, as was metallic ore and motor vehicles. Forest product traffic, though, was extremely weak - not a major surprise given the earnings reports and management commentaries from companies like Plum Creek Timber (NYSE:PCL) and Weyerhaeuser (NYSE:WY). All in all, there is still some reason for optimism in the traffic numbers - netting out coal and grain carloads, rail traffic would be have been up very slightly for April.

What's more, the data from Canada was stronger (traffic up 3.5% for April), and intermodal continues to be a source of strength. Intermodal traffic was up 9% from April of 2010 and up 1.2% on a sequential basis. This is good news for railroad operators like Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and Canadian Pacific (NYSE:CP) as intermodal traffic is a higher-margin growth opportunity. It's not such good news for the truck operators like Knight (NYSE:KNX) or Heartland Express (Nasdaq:HTLD) as intermodal transport is an alternative to their services and an increasingly viable option in a higher-fuel-price environment. (For more, see A Primer On The Railroad Sector.)

Not A Real Divergence ... Yet
Analysts are still pretty positive on the rail sector, as consensus estimates have been heading higher for CSX (NYSE:CSX), Norfolk Southern, Canadian National (NYSE:CNI), Kansas City Southern (NYSE:KSU) and Genesee & Wyoming (NYSE:GWR) in recent weeks. What's more, the data for April was clearly impacted by a big jump in coal traffic last year that skewed the comparisons.

Certainly not everything is going well - traffic in lumber and aggregates suggests that construction activity is still quite weak - but major sectors like chemicals, food, metals and cars are posting good data. While investors should keep an eye on the utility sector and its demand for coal, the data from the railroad sector suggests that although the momentum of the recovery has slowed, it is not over yet.

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

Related Articles
  1. Stock Analysis

    Analyzing Home Depot's Return on Equity (ROE)

    Discover what Home Depot's return on equity (ROE) ratio says about the performance of the company and how it relates to historical averages and industry trends.
  2. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  3. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  4. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  10. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center