It's easy to overreact to month-by-month economic data, so any sort of spot analysis has to be taken with a grain of salt. That said, the pace of rail traffic seems to be resetting to a slower but still positive level. That, in turn, suggests that the recovery may have entered a phase where growth will be less impressive but perhaps enough to strike a favorable balance between the market's need for growth and the fears of an overheating economy. (For background reading, see A Primer On The Railroad Sector.)
TUTORIAL: Fundamental Analysis
The Numbers for March
According to the Association of American Railroads' (AAR) Rail Time Indicators report, U.S. carload traffic in March 2011 rose 3.4% over 2010 and 2% from February 2011. That shows decent growth, but readers should also remember that bad weather earlier in the year curtailed some traffic at that time. Accordingly, it seems like growth is slowing as the year-over-year comps get increasingly difficult.
The numbers for Canada are different (up 0.9% in March 2011 from last year and up 3.7% from February 2011), but close enough to suggest that more or less the same trends are at work.
Intermodal results were a little different; for the U.S. there was 8.5% annual growth from March 2010 to March 2011 and 0.5% sequential growth since February 2011, while in Canada the respective numbers were 2% and -2.1% over the same time periods. (For more on rail stocks, check out Rail Stocks Chugging Right Along.)
Ethanol is Changing the Game
March 2011 was hardly the first month significant month for ethanol traffic, but the AAR offered up some interesting numbers to put it in context. Specific numbers for ethanol haulage were not in the report, but everything in the data presented suggests that a significant part of the nearly 11% growth in March 2011 chemical carload traffic was due to ethanol. Likewise, with 3.6% of the March 2011 domestic corn production going to ethanol, that creates demand for carloads of grain as well.
It doesn't automatically follow that that's a buy signal for Archer Daniels Midland (NYSE:ADM) or Pacific Ethanol (Nasdaq:PEIX); volume growth is just one part of a buy thesis. Still, savvy investors never ignore data and the rail data suggests ethanol demand is solid.
Moreover, it's not just the ethanol refiners and corn farmers that have a stake in this development. The growth in the ethanol market, as well as the development of oil fields like the Bakken that are not yet fully tied into pipelines, is leading to higher demand for tanker cars. That's a positive for manufacturers and leasers like GATX (NYSE:GMT), Greenbrier (NYSE:GBX), Trinity (NYSE:TRN) and Berkshire Hathaway's (NYSE:BRK.A) Union Tank Car. (To read more on ethanol, read Back To The Future With Ethanol.)
Less Growth, But Growth Still
Railroad stocks have started to diverge a bit, with some like CSX (NYSE:CSX) continuing to show decent momentum, while Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC) have flattened out a bit. Still, that has to be viewed in the context of an impressive rebound from the early 2009 lows - a rebound that has seen names like Union Pacific and CSX more than double, while names like Norfolk and Canadian National (NYSE:CNI) have lagged a bit in comparison (but have still done quite well in absolute terms).
The Bottom Line
It's worth repeating that one or two months of data is weak tea when it comes to formulating a robust investment thesis. Still, railroad investors need to think about whether the economic recovery has reached a point where slow, steady growth is a more likely outcome. That might be good for the broader market - enough growth to keep profits moving but not so much as to lead to high inflation. Unfortunately, steady growth would also likely be a catalyst for a sector rotation out of railroads. (For some railroad stocks, check out Top Performing Railroad Stocks.)
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