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October Rail Data – A Tale Of 2 Economies?
There is no question that times are still very hard for many people. Unemployment hovers in the 9% range, foreclosures and a depressing housing market weigh on many communities, and nobody seems to feel especially comfortable with where the economy is at. And yet, if you look at the rail data from the American Association of Railroads' "Rail Time Indicators," there are more signs of strength than you might imagine. While many (if not all recessions) seem to break some prior rule about what can, or cannot happen, in prelude to a recession, it is hard to see how recent data out of the transports is indicative of an economy toppling over.
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October's Data
After a rough patch in the spring and summer, it looks like rail traffic is back on the right direction. In the U.S., rail carloads rose 1.7% from the prior year and 0.5% from September. Excluding coal, the year-over-year growth was 2.1% and excluding coal and grain, the figure jumps to a healthy-looking 5.2%. Traffic levels are now closer to the peak year of 2006 than the trough year of 2009 - encouraging to those who will see further room for growth and perhaps discouraging to those who might ask "are things really better?"
It's worth noting, too, that this was the highest number for carloads since 2008. Moreover, 12 of the 20 categories that AAR tracks were positive - a level that's basically bang-on with the trend of recent months.
Good News For King Coal?
Coal is a huge component of rail traffic, and the whole coal sector has struggled of late. While some companies like Arch Coal (NYSE:ACI) have had particular production issues, there has been a general malaise among thermal coal producers like Peabody (NYSE:BTU), Arch, and Cloud Peak (NYSE:CLD) as it pertains to U.S. demand. Whether due to environmental concerns, affordable natural gas prices, or regional economic issues (or, more probably, some combination), domestic demand has not been so strong.
Luckily, export demand has remained solid and it looks as though domestic demand may be bottoming out and picking up. Clearly that would be a positive both for the coal companies and the rail carriers like Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) that rely so much on coal carriage. (For more on investing in coal and other resources, check out How To Invest In Commodities.)
Is Intermodal Pointing to a Happier Holiday Season?
Intermodal rail traffic increased 3.6% in October. With many retailers building inventory for the Christmas shopping season, this increase may be grounds for cautious optimism that this holiday season will be a little stronger.
To be sure, there are some areas of concern. Not all intermodal companies are doing great right now, as J.B. Hunt's (Nasdaq:JBHT) performance can be contrasted with Hub Group (Nasdaq:HUBG), and air carriers like Atlas Air (Nasdaq:AAWW) that often service more time-sensitive or delicate goods are not seeing great conditions.
A Strong Fall Moving to a Strong Year End?
Rails like Union Pacific and Norfolk Southern (NYSE:NSC) have clearly been rallying since early October and the traffic data would seem to support this optimism, even though analysts have been mixed in their earnings revisions. Assuming, though, that analyst opinion is reactive and traffic patterns are a bit more predictive, it looks like this is a solid set up for the end of the year in these stocks.
The Bottom Line
Many of the Class 1 rail stocks are now in that value investor twilight zone of "cheap enough to own, but not quite cheap enough to buy," with Canadian Pacific (NYSE:CP) and CSX arguably looking like the bargains. On the flip side, Genesee & Wyoming (NYSE:GWR) has done a fair bit better and has the valuation to prove it. (For more, read The Value Investor's Handbook.)
Although conditions on Main Street are tough, there are signs here and there that things are getting slowly better. Couple that with encouraging rail traffic data and it seems to make more sense to be cautiously positive on the economy than pessimistic. That's not to say that there aren't ample reasons for worry - high federal debt, sky-high gold prices, and loose monetary policy among them - but at this point it looks as though economy activity is still on the way back up.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson, CFA, did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
October's Data
After a rough patch in the spring and summer, it looks like rail traffic is back on the right direction. In the U.S., rail carloads rose 1.7% from the prior year and 0.5% from September. Excluding coal, the year-over-year growth was 2.1% and excluding coal and grain, the figure jumps to a healthy-looking 5.2%. Traffic levels are now closer to the peak year of 2006 than the trough year of 2009 - encouraging to those who will see further room for growth and perhaps discouraging to those who might ask "are things really better?"
It's worth noting, too, that this was the highest number for carloads since 2008. Moreover, 12 of the 20 categories that AAR tracks were positive - a level that's basically bang-on with the trend of recent months.
Good News For King Coal?
Coal is a huge component of rail traffic, and the whole coal sector has struggled of late. While some companies like Arch Coal (NYSE:ACI) have had particular production issues, there has been a general malaise among thermal coal producers like Peabody (NYSE:BTU), Arch, and Cloud Peak (NYSE:CLD) as it pertains to U.S. demand. Whether due to environmental concerns, affordable natural gas prices, or regional economic issues (or, more probably, some combination), domestic demand has not been so strong.
Luckily, export demand has remained solid and it looks as though domestic demand may be bottoming out and picking up. Clearly that would be a positive both for the coal companies and the rail carriers like Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) that rely so much on coal carriage. (For more on investing in coal and other resources, check out How To Invest In Commodities.)
Intermodal rail traffic increased 3.6% in October. With many retailers building inventory for the Christmas shopping season, this increase may be grounds for cautious optimism that this holiday season will be a little stronger.
To be sure, there are some areas of concern. Not all intermodal companies are doing great right now, as J.B. Hunt's (Nasdaq:JBHT) performance can be contrasted with Hub Group (Nasdaq:HUBG), and air carriers like Atlas Air (Nasdaq:AAWW) that often service more time-sensitive or delicate goods are not seeing great conditions.
A Strong Fall Moving to a Strong Year End?
Rails like Union Pacific and Norfolk Southern (NYSE:NSC) have clearly been rallying since early October and the traffic data would seem to support this optimism, even though analysts have been mixed in their earnings revisions. Assuming, though, that analyst opinion is reactive and traffic patterns are a bit more predictive, it looks like this is a solid set up for the end of the year in these stocks.
The Bottom Line
Many of the Class 1 rail stocks are now in that value investor twilight zone of "cheap enough to own, but not quite cheap enough to buy," with Canadian Pacific (NYSE:CP) and CSX arguably looking like the bargains. On the flip side, Genesee & Wyoming (NYSE:GWR) has done a fair bit better and has the valuation to prove it. (For more, read The Value Investor's Handbook.)
Although conditions on Main Street are tough, there are signs here and there that things are getting slowly better. Couple that with encouraging rail traffic data and it seems to make more sense to be cautiously positive on the economy than pessimistic. That's not to say that there aren't ample reasons for worry - high federal debt, sky-high gold prices, and loose monetary policy among them - but at this point it looks as though economy activity is still on the way back up.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson, CFA, did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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