Investopedia: Genesee's Bold Bid To Be The Leading Short-Line Operator

It's always interesting to see how nimble and well-managed companies can prosper by zigging when larger rivals zag. Class 1 railroad operators like Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC) have spent the last three decades selling off their short-line operations in response to the Staggers Act, while short-line specialist Genesee & Wyoming (NYSE:GWR) has been busy buying short-line rails and building itself into one of the premier operators.

On Monday, Genesee announced a major expansion of that strategy - agreeing to acquire fellow short-line operator RailAmerica (NYSE:RA) for $27.50 per share or about $1.4 billion overall. This is a very sizable deal for Genesee & Wyoming and one of those bold moves that will either vault the company to a new level of operating performance or saddle the company for years with debt and non-synergistic assets.

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Investopedia: Will Natural Gas Keep Sapping Power From Rail Traffic?

If there is anything to take away from the February rail traffic data (as reported by the Association of American Railroads), it's that the shift away from coal as a fuel for electricity production is not just theoretical anymore. While major rails will adjust to this shift in time, it seems likely to shake up the business in 2012.

February Data - The Familiar "But"
The story on U.S. rail traffic data is getting a bit routine here of late. Traffic was down 1.9% from last year (and down 2.9% from January), *but* traffic excluding coal and grain was up 7.7% (and up 5.5% excluding just coal).


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Investopedia: Genesee & Wyoming An Uncommon Growth Story

Genesee & Wyoming (NYSE:GWR) is certainly not a regular rail story. Unlike Class 1 railroads like Union Pacific (NYSE:UNP) or Norfolk Southern (NYSE:NSC), acquisitions are a significant part of the growth story and foreign operations are key to the company's future. Also, unlike many rails, investors are willing to pay a pretty hefty multiple to own this railroad.

A Mixed End to 2011  
Genesee & Wyoming's earnings for the fourth quarter were relatively mixed. Revenue was pretty good, as reported revenue rose 24% and "same rail" revenue climbed 8%. Although carload volume was modest, yield was up nicely.

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Investopedia: Rail Traffic Ends 2011 On A High Note

Not only did rail traffic continue to rebound in 2011, but the railroads saw a very strong end to the year in December. Plenty of ground has been regained from the depths of the recession, but traffic is still well behind peak levels in 2006. In addition, rail shipping is more compelling than ever before, with higher diesel prices and intermodal traffic an increasing and profitable component of many rails' business plan.

December's Data
For the month of December, U.S. rail traffic rose 7.3% on a year-over-year basis and 1.8% on a month-over-month basis. Intermodal traffic was up 9.4 and 0.4%, respectively, and Canadian numbers were likewise quite strong (rail traffic up 8.9 and 6.8%, and intermodal up 10.2 and 1.7%, respectively).

Driving home the strength of these results is the fact that 16 of the 20 major categories tracked by the Association of American Railroads (and published in Rail Time Indicators) were positive in December. That's the strongest result in a year, and only the grain category showed real weakness (down about 3%).

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Investopedia: 2011 In Review - Railroads

Maybe any sector gets interesting after a while if investors follow it closely enough. It was definitely interesting to watch the trends in railcar traffic and Wall Street perception for railroads this year. All in all, this was quite a solid year for the industry and the "average" railroad not only beat the market, but beat it by a healthy margin. Although the linkage between railroads and ducks is not exactly obvious on first blush, 2011 showed that they have at least one thing in common; things may look consistent on the surface, but there can be a lot of turbulence below the waterline.

Rail traffic went on a noticeable skid from the early spring and into the summer, feeding a lot of fears that industrial growth had stagnated in the U.S. and the economy was at risk of slipping back into recession. So far, though, it looks like this slide was just part of the seasonal pattern in traffic that has held true for many years now. Not only has rail traffic rebounded nicely, but intermodal activity continues to accelerate and pricing has been solid. (For related reading, see A Primer On The Railroad Sector.)  

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Investopedia: October Rail Data - A Tale Of 2 Economies

There is no question that times are still very hard for many people. Unemployment hovers in the 9% range, foreclosures and a depressing housing market weigh on many communities, and nobody seems to feel especially comfortable with where the economy is at. And yet, if you look at the rail data from the American Association of Railroads' "Rail Time Indicators," there are more signs of strength than you might imagine. While many (if not all recessions) seem to break some prior rule about what can, or cannot happen, in prelude to a recession, it is hard to see how recent data out of the transports is indicative of an economy toppling over.

October's Data  
After a rough patch in the spring and summer, it looks like rail traffic is back on the right direction. In the U.S., rail carloads rose 1.7% from the prior year and 0.5% from September. Excluding coal, the year-over-year growth was 2.1% and excluding coal and grain, the figure jumps to a healthy-looking 5.2%. Traffic levels are now closer to the peak year of 2006 than the trough year of 2009 - encouraging to those who will see further room for growth and perhaps discouraging to those who might ask "are things really better?"

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Investopedia: September's Rail Traffic - Past The Pause?

Like many economic indicators, rail traffic is both invaluable and misleading. It's invaluable, because it is a strong signal of the derived demand in an economy, and the amount of economic activity, particularly industrial. However, it can be misleading when one quarter, let alone one month, can be more about noise than a real trend. With that in mind, it looks like rail traffic may be on the road to recovery, but the touchy state of the economy makes that a difficult call to make, with much conviction.

September's Traffic 

According to Rail Time Indicators, the monthly publication of the Association of American Railroads, U.S. rail traffic rose 1.1% from last year, in September, and was up a like amount on a month-on-month basis. Intermodal traffic, an increasingly significant part of Class one railroad earnings, was likewise strong, up 2.3% from last year and 1% from last month. Excluding coal and grain, traffic was up more than 4% and "industrial" categories grew more than 6%.

Canadian results were a bit more eccentric, showing stronger year-on-year growth in rail traffic, up 3.9%, but weaker results on a monthly basis, down 0.6%, and declines in intermodal traffic.

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July's Rail Traffic Data As Clear As Mud

During times of economic uncertainty, many investors look far and wide for data to help make sense of it all. Unfortunately, rail traffic data is not a big help today. Much like that classic Monopoly illustration of a man with his palms out and seeming to shrug, it is hard to get much useful information on the economy these days from the traditional measurements and statistics. Perhaps that is just how things are today; there are certainly signs that recovery continues to crawl along, but there are plenty "danger" signs flashing along the way. 

Another Dip Down 
The strong recovery trend in rail traffic is definitely over and done with for now, as July's results showed another decline (the second in four months). Rail traffic in July fell 1% from last year's level, while it did climb 0.7% on a sequential basis. Canadian traffic was quite a bit stronger, up 3.7% from last year, and intermodal was strong both in the U.S. and Canada. 


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(Repost) Investopedia: April Rail Data - A Penny On The Tracks?

There is an interesting set-up in the transportation sector right now. The Dow Jones Transports Index is near a 52-week high, but it looks like momentum in the rail sector may be slowing. One month certainly proves nothing, but if traffic volume is stagnating that could mean that the end of robust revenue growth in the industrial sector and a transition to the next phase of the economic cycle.


A Tough April for King Coal
According to Rail Time Indicators, a monthly publication of the Association of American Railroads, U.S. rail traffic slipped 0.2% from the year-ago level in April and 2.5% on a sequential basis - the first year-on-year decline in over twelve months. Intermodal traffic was stronger though, growing 9% annually and 1.2% sequentially. (For more, see Rail Traffic Suggests A Slower Pace.)

At over 40% of all carload traffic, as coal goes, so goes the rail sector and April was a tough month for coal shipments. Coal traffic declined 2.9% from last year, but this number merits a little more investigation. Back in 2010, the April carload figure for coal surged more than 7% as utilities looked to rebuild coal stockpiles that had been run down during the recession. Consequently, it was a very difficult comparison. 

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Investopedia: A Primer On The Railroad Sector

Maybe it seems quaint that an industry most associated with robber barons, the 19th century and the taming of the West even survives today, but railroads are still very much a significant part of the North American economic infrastructure. As major components of the transportation sector, railroad companies and their stocks are certainly worth the time and trouble to investigate further as their cyclical nature suggests that there will always be opportunities again in the future to buy (or sell) these stocks.

What the Railroads Do
To a certain extent, railroad companies operate a pretty straightforward and obvious business – they charge companies for carrying cargo over their network of rails and railcars. In practice, it is a bit more complicated than that.

Major railroads in North America basically operate as duopolies – Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern Santa Fe run routes throughout the Western U.S., Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX) control the East, and Canadian Pacific (NYSE:CP) and Canadian National (NYSE:CNI) operate throughout Canada. Again, though, the details are a little more complicated.

Within the rail industry, railroads are frequently broken up by category – Class I, Class II and Class III railroads. The distinctions between classes are a product of the railroad's revenue, with Class I being the largest and Class III being the smallest. In actual practice, though, these categories have questionable value – Kansas City Southern (NYSE:KSU) is technically a Class 1 railroad, but is much smaller than even the smallest of the "Big Six". Nevertheless, it is worth noting that there is profit opportunity not only in running large continental networks, but also operating smaller short-line railroads that connect industries to supply sources (like a power plant and coal mine) or connect companies and small towns to larger railroad lines. (Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth. (For more insight see Great Company Or Growing Industry?)

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2010 - The Year On The Rails

There has been a long-held theory in the stock market that the performance of transport stocks has a great deal to say about the health of the economy and the direction of the stock market. If that concept still has legs, then the performance of the railroad sector has to be encouraging for the health of the U.S. economy. On the whole, the railroad sector (which often includes companies that supply the operators as well as the operators themselves) rose about 30% for the year - making it one of the leading sectors in the market.  


All About The Traffic
It seems beyond question that the ongoing strength in rail companies and their stocks has been a product of ongoing strength in rail traffic. Around February of this year, average weekly carload numbers finally climbed above the very depressed levels of 2009. Since then, every month has seen year-on-year carload growth. That has given rail operators a two-fold boost - the companies can not only make more money on the volume (as well as stronger pricing), but can better leverage their very high fixed operating costs. (For more, see Top Performing Railroad Stocks.)

Class 1's Were Not Held Back
With widespread traffic growth and no major strikes or labor disputes, Class 1 railroads in the U.S. and Canada all performed well in 2010. As is so often the case, improving conditions had the greatest benefit to what had been the notable lagging operator. For years, Union Pacific (NYSE:UNP) suffered with under-priced long-term contracts, ineffective surcharges and weak operating performance. Although Union Pacific is still not a top operator, the company has made some significant improvements and the stock led the sub-sector with roughly 40% gains.


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Rails Roll On Into The Fall

Although the railroad sector spent most of the summer chopping along (as did the broader market), between fears of a double-dip recession and the realities of ongoing strength, the fall has been off to a good start. Looking at the rail traffic data provided by the American Association of Railroads, September was another strong result for U.S. carriers and if this keeps up, the stocks will likely continue to find healthy bids. 


The Cars Of September
The data shows that U.S. carloads rose almost 8% on a year-over-year basis in September and achieved the highest average number of carloads per week since October of 2008. Industry-watchers may remember this as the high point before the bottom fell out in this recent recession. In any event, traffic was still down almost 8% from the 2008 level, while carloads did rise 2% on a sequential seasonally-adjusted basis. (For more, see Rails And Supplies Suggest More Volatility) 

What is interesting is that there appears to be a bit of a divergence between the United States and Canada. Although the four non-holiday weeks of this September were some of the most active weeks all year, Canadian traffic is showing less momentum. Now, it is true that Canada never got as bad as the U.S. and the momentum is still positive, but the relative outperformance gap seems to be shrinking a bit. 


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Railroads Suggest Recovery Is Soft

Individual investors are commonly told not to try to time the markets or pay all that much attention to macro issues like the economy. What investors should do instead, according to this thinking, is simply focus on buying the best stocks possible and not worry about the rest. Perhaps that works for some investors, but given how economic conditions can have a major impact on the value of a portfolio, it seems silly that most investors would not make decisions with a view towards the economy. 

Looking at monthly rail traffic is one way of assessing the health of an economy. While trucking is certainly a major component of the U.S. distribution infrastructure, and is absolutely essential for "the last mile" up to the docks at Wal-Mart (NYSE:WMT), it is not the only game in town. Railroads, particularly the large railroads (also known as Class 1 railroads) carry a huge amount of goods and are a critical link in the distribution change. It stands to reason, then, that the health of the rails has something significant to do with the health of the economy.

How Was July?One month does not make a trend, but July's numbers from the Association of American Railroads' Rail Time Indicators would seem to suggest that the pace of the economic recovery is slowing. Carloads were up 4% from last July and that pace of growth is slowing. Intermodal traffic is showing a similar trend, as the pace of year-over-year increases is starting to slow. Importantly, although traffic is well ahead of where it was a year ago, overall levels are still way below the old pre-2008 "normal". (For related reading, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)

Looking a little more closely, metals, cars and stone products (like gravel) were strong, but coal and lumber were both weak. 

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FedEx Is Delivering The Recovery

There must be money in gloom and doom. That is the best explanation I can come up with for why there is not more optimism and satisfaction with the global recovery. Despite numerous positive signals on economic growth in the U.S., Latin America and Asia, investors remain fixated on what could happen in Europe and the S&P 500 is basically flat for the year.  


The fiscal fourth-quarter earnings reported by FedEx (NYSE:FDX) on Wednesday reflect a lot of the reasons that I am optimistic about global growth. Volumes were strong and the company is ramping up more assets to deal with even more anticipated growth. That is basically what any investor should want to hear - if companies in the transportation sector are seeing business improve, that should presage better growth.

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Canadian National Needs To Do More

Here is an analysis of Canadian National (CNI) that I wrote for Investopedia.

I wish I had had the space to go into some of the complaints that have been lodged against CNI by its customers, and the possibility of regulatory involvement in Canada as a result. I don't think it really moves the needle with the company or stock, but it gives a different perspective on how the company conducts itself.


http://stocks.investopedia.com/stock-analysis/2010/Canadian-National-Needs-To-Do-More-CNI-UNP-CSX-GWR-KSU0429.aspx

It is an odd quirk of Wall Street that the best operators in an industry do not always get the most respect from analysts and buy-side fund managers. I think the reasoning is basically that the underperformers have the most room for improvement, and this hoped-for improvement constitutes a "catalyst" in the lexicon of the Street.  

So, in an earnings season where rival rail operators Union Pacific (NYSE: UNP) and CSX (NYSE: CSX) have already reported strong earnings, an "all right" performance from Canadian National (NYSE: CNI) gets a cooler reception. 

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