Investopedia: CSX On Target, But Hard To Find A Reason To Pay Up

Although rail stocks have come a bit off their highs, particularly the eastern operators, Wall Street still remains pretty bullish on the prospects of rail continuing to take share from trucking. With that, an in-line quarter for CSX (NYSE:CSX) isn't likely to change the story much in either direction. Improvements in the coal business next year, a continued housing recovery, and ongoing growth in the intermodal business should all lead to better volume and operating profits, but the stock's valuation indicates that Wall Street is already counting on that happening.

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Investopedia: CSX Adapating To New Realities

It wasn't long ago at all that the rails seemed to have things pretty much all going their way. Better management was producing better margins, pricing advantages over trucking were leading to good intermodal growth, and a recovering economy was supporting higher traffic and strong pricing. Then came a structural shift in electricity generation and a serious drought that hammered both coal and agricultural volumes.

To its credit, eastern rail operator CSX (NYSE:CSX) is rolling with the punches. The company is largely through the worst of the volume reset caused by declining coal demand, and while management has stretched out its margin improvement targets, there's still a pretty good case to be made for solid operating performance over the next few years. Unfortunately, the market has been quick to anticipate this and the shares don't look like a tremendous bargain today.

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Investopedia: Rails Seem To Point To A Respectable 2013

Many analysts and investors have worried about the outlook for growth in the United States in 2013, but railroad data continues to suggest an ongoing recovery/expansion in the economy. Although it's true that the rails have enjoyed an uncommonly long stretch of good performance relative to the markets, ongoing demand growth could continue to support the sector.

December's Data Looks Very Familiar
The Association of American Railroads reported that U.S. rail carload volume declined about 4% for the month of December relative to the prior year, while climbing more than 2% from November's level.

As has been the case for quite some time, coal and grain traffic declines were a major negative influence on the results. Coal volume declined by more than 13%, while export declines tied to this year's drought helped fuel a 14% decline in grain carload traffic. Excluding coal, carload traffic was up more than 3%, while traffic excluding coal and grain climbed 6%.

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Investopedia: Should November's Rail Data Encourage Investors?

In many respects, November's rail carload data (as reported by the Association of American Railroads (AAR) in its monthly Rail Time Indicators report) is more of the same, only more so. United States railroads continue to see an ongoing erosion of coal business, but underlying industrial demand continues to be relatively positive. Although a host of U.S. industrial companies continue to express caution about demand for the first half of 2013, carload traffic suggests that there may not be as much downside risk as feared.

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Investopedia: Peabody Is The Best Of A Mangy Breed

As investors have come back around to the idea that maybe coal isn't forever doomed, shares of leading coal company Peabody Energy (NYSE:BTU) have rebounded over the past quarter. Better still, Peabody delivered the sort of quarter that ought to remind investors that it is indeed a high-quality operator in the sector. Although Peabody's recent stock market action has taken away a fair bit of the easy money, long-term investors could still have reason to own this name, albeit with some above-average risks.

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Investopedia: Kansas City Southern Has The Growth, But Maybe Not The Value

Kansas City Southern (NYSE:KSU) is an odd duck in the railroad space. Although a Class 1 railroad, it's quite a bit smaller than the likes of Union Pacific (NYSE:UNP) or CSX (NYSE:CSX). Likewise, it often seems to be overlooked - more than a couple of analysts who cover the major rails don't cover Kansas City Southern. On the other hand, this company has uncommonly strong growth prospects, but a valuation to match.

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Investopedia: Union Pacific Already Rewarded For Its Quality

As I mentioned the other day in discussing CSX's (NYSE:CSX) earnings, good companies show their qualities when times get a little tougher. With that in mind, there's little to suggest that Union Pacific (NYSE:UNP) ought to be dethroned as the best railroad at the moment. While the company's pricing and operating expense control is laudable, it's worth asking how much of a premium investors should pay for a best-in-class operator facing some near-term macroeconomic challenges.

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Investopedia: In Challenging Times, CSX Shows Its Qualities

It's no understatement to say that the earnings warning from Norfolk Southern (NYSE:NSC) spooked investors in the rail sector and focused a great deal more attention on fellow East Coast operator CSX (NYSE:CSX). And yet, a company that still carries historical baggage from below-peer operating performance managed to deliver a satisfactory quarter. Although this rail company is still vulnerable to weakness in coal volume, it may not be a bad pick for investors who want to make a leveraged play on a better economy.

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Investopedia: September Rail Data - Coal Still Weak, Are Industrials Next?

With another month in the books, U.S. railroad traffic still seems to fit and support a "cautiously optimistic" sort of outlook. Traffic growth is absolutely down relative to the post-recession recovery, but still continues to push in a positive direction. That said, data pointing to a slowing U.S. economy have started worrying investors in these stocks - while the Dow Jones U.S. Railroads Index is up more than 20% over the past year, September was a rough month.

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Investopedia: Rail Traffic Perks Up A Bit

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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Investopedia: July Rail Data Shows Some Reasons For Worry

The month-by-month rail data provided by the Association of American Railroads through the monthly Rail Time Indicators publication has always been something to take with a grain of salt - one month doesn't make a trend and no trailing data report can ever tell an investor what's about to happen. All of that said, data is now flashing a strong yellow and investors in transportation stocks, not to mention industrial and resource stocks, should approach these companies with some caution. 

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Investopedia: CSX In Solid Shape Despite Weak Coal

Given how often data is reported about the railroad industry, there aren't too many secrets or surprises in the industry. In the case of CSX (NYSE:CSX), for instance, pretty much everybody knew going in that coal numbers were going to look pretty bad, but that other categories like automobiles and intermodal would help the overall numbers. Even with the operational challenges created by lower coal traffic, CSX is doing a good job of improving its operating performance.

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Investopedia: Once Again, Rails Suggest Summer Slowdown Isn't That Bad

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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Investopedia: Familiar Themes In April Rail Data

April's 2012 rail data looks like more than a little bit of history repeated. While the healths of the railroads and the economy have generally been pretty closely correlated, some of that linkage is breaking down. With coal demand plunging, but most other core industrial categories doing well, this may be a case where rails struggle to replace the high-margin coal revenue while the rest of the economy continues to grow.

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Investopedia: Investors Want Nothing To Do With Cloud Peak Energy

Warm winter weather and low natural gas prices have gutted the coal market in the United States. Utilities like American Electric Power (NYSE:AEP) are switching over as much production to natural gas as they can, while railroads from Union Pacific (NYSE:UNP) to CSX (NYSE:CSX) are reporting sharp drops in coal carloads. That is leading coal producers like Peabody Energy (NYSE:BTU) and Cloud Peak Energy (NYSE:CLD) to cut production, and leading investors to fret about the near-term outlook for EBTIDA.

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Investopedia: Rails Struggling To Replace King Coal

Investors still seem fully invested in the idea of ongoing economic recovery, but maybe that is starting to fade a bit. Not only have investors had to digest disappointing news on job growth, but rail traffic and other economic numbers are starting to look a little wobbly. The question for rail investors, then, is whether there's enough momentum left to replace the ongoing weak demand for coal.

March Numbers Look Familiar
"Ex-coal" has become an important qualifier when looking at recent railroad traffic data, and March was no exception. U.S. rail traffic dropped almost 6% on a year-over-year basis, and over 3% month-over-month for March. Ex-coal, the comparison improves to 2.4% (year over year) and ex-coal and ex-grain, it jumps further to 4.4%. While that's all well and good for the economy, the fact remains that lower carload volume is a headwind for rail operators.

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Investopedia: Wabtec Winning On The Rails

Sometimes it makes less sense to figure out who will strike gold and more sense to invest with the companies selling the picks and shovels. While North American Class 1 rails have definitely seen improved operating conditions, there are still variations between the companies when it comes to traffic growth, pricing and efficiency.

Why not consider Wabtec (NYSE:WAB), then? Not only does this rail equipment company supply virtually every North American railroad operator, it also serves the transit markets, international carriers and manufacturers of cars and locomotives. Though the stock has done well already, the financials and backlog here are such that it may not be unreasonable to hold out hope for more to come. For related reading, see A Primer On The Railroad Sector.

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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: January Rail Traffic Good For Industry, Not Great For Rails

Rail traffic is a good economic indicator as it's such a major part of how raw materials and finished goods move around the country. Curiously, though, data can be good for the economy but not necessarily so good for the rail industry, and January was one of those months. That said investors should not yet be in any hurry to worry about the health of the rails in 2012.

Rail Growth Depends Where You Look  
On an overall reported basis, U.S. rail traffic wasn't so special for the month of January. Carloads were up just barely on an annual basis, while traffic declined nearly 2% from December. Of the major reporting categories, only 11 were up in January (down from 15 categories a year ago and 16 in December).

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Investopedia: Does CSX Have The Most Levers To Pull In 2012?

Broadly speaking, these are still good times for the major railroads in the U.S. The economic recovery continues to fuel a decent recovery in volume, while the price advantages of rail versus truck give the companies leverage on pricing. It also certainly isn't hurting that higher-margin intermodal business is growing (albeit still small) part of revenue.

Against this backdrop, almost any rail would be a decent option. Looking at 2012, CSX (NYSE:CSX) may be an underappreciated relative value play among the top rails. The question for CSX is largely about whether the company can achieve cost/efficiency improvements that could drive better earnings performance than its peers. (For related reading, see Rail Traffic Ends 2011 On A High Note.)

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