If recent results are any indication - and they likely are - of how well the railroad and rail car industry is doing, then the remainder of earnings season as well as the remainder of the year should be more than satisfactory for most transportation investors.
TUTORIAL: Fundamental Analysis
The Engines That Pull 'Em
Two of the three rail carriers that recently reported last quarter's numbers hit homeruns. Norfolk Southern (NYSE:NSC) pumped up its net income by 26%, CSX Corp. (NYSE:CSX) posted a 30% improvement on its first-quarter bottom line.
Canadian Pacific (NYSE:CP), on the other hand, came up a little short. Though its earnings of $0.21 per share topped the expected $0.20, it was still well shy of the $0.58 earned in Q1 of 2010. However, the reason for the weak results was a legitimately uncontrollable one: the weather. Record snowfall and extreme flooding simply made it impossible to do all the business the company wanted to do.
Though the actual potential income Canadian Pacific expected to generate was not offered, it's reasonable to assume its increase would have mirrored Norfolk's 7.9% increase (minus coal and grains) in total traffic, or CSX's 7.0% increase in total volume. Both carriers expected these growth trends to continue. (More than two-thirds of the nation's coal is transported by rail, for more see A Primer On The Railroad Sector.)
The Cars They Pull
While the rail carriers themselves are an indication of present demand, that demand can come and go. Results and outlooks for the rail car manufacturers, however, indicate long-term confidence (or lack thereof) in demand for rail traffic, as orders for new rail cars have a commitment period of years. GATX Corp. (NYSE:GMT), for instance, has signed a deal to purchase over 12,000 freight cars from Trinity Industries (NYSE:TRN) over the next five years.
Though any contract that adds to the top and bottom line is welcome, Trinity was already turning things around in 2010. Though annual per-share earnings slumped to a multi-year low of $0.84, sequentially, earnings started to inch higher again after a mere $0.06 earnings per share in Q1 of 2010. For the first quarter of 2011, per-share earnings of $0.30 easily topped last year's Q1 figure, as well as beat estimates of $0.23. It was also the most profitable quarter in the last seven.
Competitor American Railcar Industries (Nasdaq:ARII) took a loss for Q1, as expected, though the loss narrowed to about three-quarters of the loss seen in the same quarter a year earlier. Revenue was up a hefty 62% for the quarter. In fact, demand has been so brisk that American Railcar Industries now plans to reopen its Alliance, Ohio castings factory that was shuttered in mid-2009 due to tepid demand. (Railroad transport is still very much an active industry sector, for more see Great Company Or Growing Industry?)
The Bottom Line
If it were just one or two of these stocks, or only one of these industries, that was seeing better days, it may be easy to dismiss. When all of them are growing though, and when shippers are starting to make long-term commitments to equipment purchases, it's pretty clear the rail industry is one of the areas you'll want to park some long-term money. (It consisted of two capitalized industrial and 12 capitalized railroad companies, see Why The Dow Matters.)
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