Tickers in this Article: UNP, CSX, DD, DOW, WY, LPX, PACR
December may generally be a slower month for transports, but the recovery in rail traffic continued on through the last month of 2010. This continues what has been a relatively strong rebound from mid-2009, though the recovery has only recaptured about half of the former level of weekly carload traffic. Not only is this encouraging news for rail investors who continue to hang on to these relatively strong stocks, but it should be encouraging to any investors weighted towards economic recovery/expansion plays.

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The December Data Continues The Trend
According to the Association of American Railroads' monthly Rail Time Indicators, U.S. rail traffic was up 9.4% in December of 2010, relative to the prior year. If that sounds like a strong result, it is - the pace of annual improvement had been slowing a bit, but December's result represents some reacceleration above the full-year 2009 growth of 7.3%. Growth was likewise strong in the intermodal market, as traffic here increased 13.3% on an annual basis.

Putting the data into a bit more context, the recovery is strong but still has a ways to go. Although December traffic finally surmounted the 2008 level, it was because the data finally annualized the steep declines that began in late 2008. Relative to 2007 and 2006, traffic is still down about 10-15% on a weekly basis. (For more, see Core Stocks For 2011.)

Details Matter
While there is still a sizable gap between today's traffic levels and the "normal" levels of 2006-2008, there is at least one reason to be skeptical that a strong recovery in traffic can continue. Traffic levels in cargo closely tied to the housing boom - forest products (lumber) and aggregates (gravel, cement, etc.) - have not really recovered much (though they have rebounded off a bottom) and there are no signs pointing to a quick turnaround. On the other hand, rail traffic in categories like chemicals and grain are much closer to pre-recession levels. (For more, see Rail Traffic Points To An Ongoing Recovery.)

What that might mean (and emphasis on "might") is that DuPont (NYSE:DD) and Dow (NYSE:DOW) have already benefited from the rebound about as much as they can and might be about to transition to more of an expansion-growth phase - a phase that is likely to feature lower growth rates. It also raises at least the possibility, though, that the likes of Weyerhauser (NYSE:WY) or Louisiana-Pacific (NYSE:LPX) could still be rebound candidates, although nobody seems to know if the housing rebound is a 10-year phenomena or a 30-year slow march.

Solid Earnings for Transports
Looking at the rail traffic growth in the last quarter of 2010, the revenue growth estimates for railroad companies like Union Pacific (NYSE:UNP), CSX (NYSE:CSX) and Canadian Pacific (NYSE:CP) look achievable. High single-digit carload growth, double-digit intermodal growth, and low-single digit price growth all look to be in hand.

Looking into 2011, the same would appear to be the case. Revenue growth assumptions range from about 7% (for Canadian Pacific and CSX) to 11% (Kansas City Southern (NYSE:KSU)) for the year. Pricing growth in 2010 was running in the mid-to-high single-digits through the third quarter, so even if there is a modest decline in both traffic and price growth, these revenue growth assumptions look attainable if not perhaps a bit on the low side.

The Bottom Line
Of course, it is not just railroads that can benefit from current trends and conditions. While the railroads and major intermodal companies like Hub Group (Nasdaq:HUBG) trade near 52-week highs, there are a few names like Pacer (Nasdaq:PACR) and Echo Global (Nasdaq:ECHO) that do not trade so high ... yet. The easy money is in hand and the end of the recovery phase of the cycle is arguably in sight, but careful investors can still find ways to profit from the ongoing demand growth in the transportation sector. (For more, see 2010: The Year On The Rails.)

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