This summer is starting to feel a lot like last year. Europe seems to be coming apart at the seems, volatility is tracking up, and investors are on the hunt for proof that the economy is sliding back toward recession. Like last year, though, the data from the Class 1 North American railroads just doesn't support a panic scenario. Yes, business activity is leveling off, but that's what usually happens in the summer and there doesn't seem to be a compelling reason to hit the big red button just yet.
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Carload Data Looks Awfully Familiar
There's a broken record aspect to the rail carload data, as industrial demand remains pretty respectable, while the more volatile (but still lucrative to the rails) coal and grain shipments fall off.
For May, total carload traffic in the U.S. fell nearly 3% from last year, but rose almost 2% this past April. Stripping out coal, the year-on-year comp jumps to over 4%, and stripping out grain and coal pushes that growth rate to nearly 7%.
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Intermodal Is Interesting
As someone who follows this data on a month to month basis, I find it interesting how the data reported by the Association of American Railroads (in their monthly publication Rail Time Indicators) for intermodal traffic varies from what the shipping and logistics companies report.
Intermodal traffic was up 3.5% in May, and down 0.6% on a sequential monthly basis. That, frankly, looks stronger than what companies like UTi Worldwide (Nasdaq:UTIW) or Expeditors (Nasdaq:EXPD) are reportedly seeing, not to mention the overall industry data seen in container shipping rates and Asian cargo terminal activity.
The answer very likely lies in scale. Intermodal is still a small, fast-growing business for the railroads. Consequently, the growth that the rails are seeing from competitive share growth (versus trucking companies, for instance) is able to overpower that weaker overall industry trend.
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Industrial Demand Looking Good, Western Railroads May Be in Better Shape
The erosion of the coal market continues to be a major theme for the railroads and a major risk to companies like Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX), as utilities continue to switch from coal to natural gas. Coal shipments dropped 12% from last year, and coal has now dropped to about one-third of electricity generation. While it shouldn't get much worse (most of the plants that can switch, have switched), these levels are bad for this lucrative (for the rails) business and terrible for coal companies.
But it's not universally bad. Operating conditions aren't great for Powder River Basin coal, but they're better than for Appalachian coal, and that's a modest relative positive for Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A, BRK.B) BNSF. Likewise, petroleum shipments (largely from the under-pipelined Bakken) continue to offer growth potential for the west-off-the-Mississippi operators.
Last and not least, overall industrial demand and activity seems to still be alright. Yes, investors reacted badly to data showing slowing sales growth at Fastenal (Nasdaq:FAST) and Grainger (NYSE:GWW), but the rail data doesn't suggest anything especially unusual is going on. In fact, given the lack of help from construction (residential, commercial, and civil), I'd argue that underlying industrial activity in the U.S. is still pretty solid.
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The Bottom Line
I am not naive enough to expect that data is going to stand in the way of a good panic, and to be fair, maybe the economy is starting to weaken under the strain of Europe and China. That said, the data from the rails continues to be positive, and while investors need to be selective, there's still reason for long-term confidence.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.