Railroads are a classic example of a derivative industry - that is, they produce nothing on their own and the demand for their services is a product of (a derivative) the demand for other goods. That is something that is worth keeping in mind as the railroads continue to meet anniversary dates in this economic recovery and face increasingly difficult comparisons.
February - Another Quarter of Mixed Data
January's rail traffic data, which we highlighted in our Raid Traffic Data Still Largely Good News article, was mostly positive but had a few worrying signs - namely the slowdown in intermodal traffic in the U.S. and weaker rail performance in Canada. Like January, February's data was not as clean as economic optimists might have hoped.
U.S. rail traffic increased more than 4% from last year (and almost 3% from 2009) and intermodal traffic increased more than 10%. Unfortunately, the sequential performance was not nearly so strong - rail traffic slid 3% from January's level, while intermodal activity was up only a fraction of a percent. As intermodal is a profitable growth area for railroad operators like Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, that is not an insignificant figure.
While bad weather seems to have had a significant impact, investors should at least consider this a yellow flag until the next month or two of data confirm that February's performance was just a weather-related anomaly.
Likewise, investors in Canadian National (NYSE:CNI) and Canadian Pacific (NYSE:CP) do not have a lot to celebrate. Canadian rail traffic was just barely positive relative to 2010 levels, and was down about 1.5% on a sequential basis. Intermodal traffic did pick up though, rising 7% from last year and almost 2% from the January level.
DotThe Details Support the Weather Hypothesis?
Here is something for investors to puzzle over - if weather was responsible for the sluggish U.S. rail performance, why was performance so idiosyncratic across traffic types? For instance, coal producers like Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI) continue to see decent volume increases and coal traffic was up 4% in February. Cars, pulp/paper, metals and aggregates were all pretty strong as well. In fact, only grain was notably weak.
Perhaps some of the answer lies in year-to-year and month-to-month anomalies. After all, while coal traffic was up 4% in comparison to 2010 levels, it was still down more than 6% from 2009. Likewise, last year's rise in grain traffic seemed a bit anomalous as well. (For more, see Top Performing Railroad Stocks.)
Now Comes the Tricky Part
March and April is where things will get a bit interesting for the rail sector and economic trainsporters. March and April of 2010 were very active months for the rail sector as companies rushed to rebuild inventories after the stirrings of an economic recovery. That is going to make for some challenging comps. It would not be altogether shocking if the comps actually turned slightly negative for the first time since the rail traffic recovery began, but investors should not rush to sell CSX (NYSE:CSX) or Norfolk Southern (NYSE:NSC) if that were to happen - at least not so long as the general year-to-date trend in rail traffic stays positive.
In the meantime, investors looking for undervalued plays on transport might want to think more about the sea than land. True, many trucking stocks have sold off with the rise in oil prices, but shippers like Genco (NYSE:GNK) and Diana (NYSE:DSX) may be the better bargain if the global economy manages to stomach the turbulence in the Middle East and North Africa and continue growing. (For related reading, see Has Dry Bulk Shipping Reached Low Tide?)
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