The August edition of Rail Time Indicators from the American Association of Railroads once again offers investors an interesting read on several trends in the North American economy. Although the ongoing declines in coal traffic are still a revenue risk for Class 1 operators like Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC), the underlying improvements in industrial traffic are encouraging for the economy as a whole.
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The Numbers for August
Carload traffic fell 1.4% from August of 2011 and 0.7% from July of this year. Once again, however, coal is having a major negative impact, as carloads of coal declined more than 7% from last year. For those who are curious, there has not been a single month of year-over-year growth in coal shipments this year so far, and coal traffic is well below the levels of the past four years.
On a more positive note, ex-coal traffic increased more than 3%, with AAR's self-reported "industrial" traffic up 1.5%. There are 11 categories of rail traffic showing year-on-year growth this quarter, up from eight in the last month and down from 12 last year. Intermodal traffic continues to gain share, growing 4.3% this month. As a reminder, intermodal is not just a railroad phenomenon, as companies like J.B. Hunt (Nasdaq:JBHT) and Hub Group (Nasdaq:HUBG) benefit from growths in this market as well.
What's Working, What's Not
Petroleum continues to be far and away the biggest source of rail traffic for Class 1 carriers. Bakken producers like Hess (NYSE:HES) continue to have little choice but to turn to rail as a means of getting oil and petroleum products out of the Bakken, as there is a striking lack of pipeline takeaway capacity in the region. While this traffic will likely go away in the years to come, its development is helping to fill some of the gap created by declining coal traffic.
Two other areas of note in rail traffic are lumber and autos. Motor vehicle carloads were up 13% across North America, and have shown year-on-year growth in every month but one, stretching back to January of 2011. Lumber has followed a broadly similar trend, though the rally actually stretches back to January of 2010. Of course the 21.3% growth in August year-over-year has to be kept in the context of the huge drops seen from 2006 through 2009, but it does look like there's a real recovery here.
What's not working so well is metals. Metallic ores (mostly iron ore) have been softer, due in large part to the weakness in the steel industry. Likewise, the weakness in steel scrap traffic is a bit of a concern, but ought to be kept in the context of the overall growth in industrial cargo categories.
The Bottom Line
I would never suggest that investors buy or sell railroad stocks like CSX (NYSE:CSX), Canadian Pacific (NYSE:CP) and so on just on the basis of month-to-month cargo traffic numbers. Rather, these are good incremental data points for investors watching the broader economy and looking to update their macro thinking. These stocks have been pretty strong since midyear, and it looks like the sector is factoring in better economic growth for the second half of the year. With many industrial companies still cautious, however, investors would probably do well to keep an eye on valuations before committing new money to the space.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.