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.

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Tickers in this Article: PCL, WY, NSC, CSX, HTLD, UNP, KSU

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