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: 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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FinancialEdge: 5 Industries Looking Strong In The Summer

The summer of 2011 has not been one of the nicer summers in recent memories. Crushing heat across much of the country is bad enough in its own right, but it is paired up with ongoing financial trouble in Europe, an unprecedented sovereign downgrade for the United States, economic worries all around and a weak stock market. Yet, even against this dour backdrop, there are still areas of the strength in corporate America.

For purposes of this article, strength refers to the momentum in corporate sales and earnings, as well as the trajectory of analyst expectations. Curiously, there are numerous divergences between those industries showing fundamental strength and stock market strength, and these may well prove to be trading opportunities for investors.

Auto Parts
The auto parts industry best highlights that dichotomy between financial and stock market strength. With strong results from companies ranging from American Axle (NYSE:AXL) to Dana (NYSE:DAN) to Tenneco (NYSE:TEN), the auto parts industry has shown very healthy revenue and profit momentum as car sales have risen more than 10% year-to-date. Curiously, this is also one of the weakest sectors year-to-date, as stocks in this group have fallen almost 20%. Perhaps investors have been spooked by the recent slowdown in passenger vehicle sales and have decided to take profits in names that, in many cases, have appreciated several times over since the worst of the recession. (For related reading, see 2011 Cars With The Highest Resale Value.)

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http://financialedge.investopedia.com/financial-edge/0811/5-Industries-Looking-Strong-In-The-Summer.aspx#axzz1V9d0n1Yu

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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http://www.investopedia.com/articles/stocks/11/primer-on-railroad-sector.asp

Investopedia: Rail Traffic Has A Strong End To A Rebounding Year

December may generally be a slower month for transports, but the recovery in rail traffic continued on through the last month of 2010. This continues what has been a relatively strong rebound from mid-2009, though the recovery has only recaptured about half of the former level of weekly carload traffic. Not only is this encouraging news for rail investors who continue to hang on to these relatively strong stocks, but it should be encouraging to any investors weighted towards economic recovery/expansion plays.

The December Data Continues The Trend
According to the Association of American Railroads' monthly Rail Time Indicators, U.S. rail traffic was up 9.4% in December of 2010, relative to the prior year. If that sounds like a strong result, it is - the pace of annual improvement had been slowing a bit, but December's result represents some reacceleration above the full-year 2009 growth of 7.3%. Growth was likewise strong in the intermodal market, as traffic here increased 13.3% on an annual basis.

Putting the data into a bit more context, the recovery is strong but still has a ways to go. Although December traffic finally surmounted the 2008 level, it was because the data finally annualized the steep declines that began in late 2008. Relative to 2007 and 2006, traffic is still down about 10-15% on a weekly basis. (For more, see Core Stocks For 2011.)

Details Matter
While there is still a sizable gap between today's traffic levels and the "normal" levels of 2006-2008, there is at least one reason to be skeptical that a strong recovery in traffic can continue. Traffic levels in cargo closely tied to the housing boom - forest products (lumber) and aggregates (gravel, cement, etc.) - have not really recovered much (though they have rebounded off a bottom) and there are no signs pointing to a quick turnaround. On the other hand, rail traffic in categories like chemicals and grain are much closer to pre-recession levels. (For more, see Rail Traffic Points To An Ongoing Recovery.)

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http://stocks.investopedia.com/stock-analysis/2011/Rail-Traffic-Has-A-Strong-End-To-A-Rebounding-Year-UNP-CSX-DD-DOW-WY-LPX-PACR0113.aspx

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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http://stocks.investopedia.com/stock-analysis/2010/2010-The-Year-On-The-Rails-UNP-NSC-CNI-CP-KSU-GWR-JBHT1229.aspx

Rail Traffic Points To An Ongoing Recovery

For the pessimist crowd of economists looking for a double-dip recession, rail traffic is proving to be a decidedly inconvenient truth. With November numbers in hand, it is pretty clear that the industrial sectors of the North American economy are continuing a slow (and decidedly unspectacular) recovery. Although the pace of growth is clearly moderating, traffic and utilization suggests that the major rail carriers can continue to see solid demand for the near future and that is a positive look-through for the economy as a whole. 

The Details of November
According to the Association of American Railroads' Rail Time Indicators, U.S. rail traffic grew 4.5% in November, while intermodal traffic increased 11.3%. On a sequential basis, seasonally adjusted traffic fell 1.1% from October, while intermodal was down 0.4%. It should be noted that an October-November decline is normal and completely consistent with the trend of past years. Once again, though, Canada was even stronger, as rail traffic rose more than 5% and intermodal increased 13%. (For more, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)

Once again, rail traffic performance was broad-based. Although agricultural products and auto traffic were both down, that again is normal for this time of year. In other words, there is no particular reason for investors in Ford (NYSE:F), Toyota (NYSE:TM) or Archer Daniels Midland (NYSE:ADM) to see any bad news in these numbers.

Of more interest to this analyst was the performance of coal. To give investors an idea of just how important coal is to the railroad industry, remember that coal represented 46% of total American railcar traffic in November. So while there are differences between Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX) in terms of the exact breakdown of their traffic, coal is important to everybody.


The following link leads to the full piece at Investopedia:
http://stocks.investopedia.com/stock-analysis/2010/Rail-Traffic-Points-To-An-Ongoing-Recovery-GWW-UNP-RAIL-ARII-NSX1210.aspx

CSX Running Hot On The Rails

If the first earnings report from the railroad sector is any indicator, there is going to be plenty of fundamental support to back up the hot stock performance of recent times. CSX (NYSE: CSX) does not have the best historical reputation, but if this company is doing well it stands to reason that this is going to be a fine quarter for this part of the transportation sector. 

The Quarter That Was
CSX reported that overall revenue rose 16% in the third quarter. Merchandise sales rose 15% (that is basically non-coal rail traffic), while coal revenue was up 23%. Carload volume increased nearly 10% this quarter (not bad), while yields were up about 6% (better!). 

Interestingly, intermodal revenue was up only 6% this quarter - interesting, as that is weaker than recent rail reports have indicated for the intermodal industry. Then again, with Western Europe in something close to hibernation, perhaps CSX's East Coast exposure keeps a lid on that intermodal performance. If that is true, then Union Pacific (NYSE:UNP), Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, and the two Canadian operators (Canadian Pacific (NYSE:CP) and Canadian National (NYSE:CNI)) could be expected to do quite a bit better on that line. 


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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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CSX's Unsurprising Surprise

For a few months now, I have had a standard response to the skeptics of the economic recovery, and it goes something like this. "If the recovery is not real, and if the recovery is stalling out, why are the railroad shipments still strong?" That point was driven home again with strong results from Eastern railroad operator CSX (NYSE:CSX).  

The Quarter That Was 
By virtually any metric, CSX had a very strong quarter. Revenue was up 22% over last year, as both volume and pricing were strong. Volume (as measured by carloads) climbed about 13% from last year, while pricing (revenue per carload) rose about 8% over the same time period. Revenue of $2.7 billion exceeded the average estimate, which makes the source of the surprise pretty apparent - since the company reports intra-quarter volumes frequently, it was the pricing that was the strongest surprise.

CSX's results gained strength on down through the income statement. Reported earnings jumped 36%, while profits from continuing operations jumped 47%. The operating ratio also improved; the reported number of 71.2%. Assuming that is accurate, that is not only a 340 basis point improvement from last year, but I believe it is the best level the company has posted since the 1999 split-up of Conrail with Norfolk Southern (NYSE:NSC). That is an impressive sign of improvement in a metric where CSX has long been a laggard. (For more, see Ratio Analysis Tutorial.) 


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http://stocks.investopedia.com/stock-analysis/2010/CSXs-Unsurprising-Surprise-CSX-NSC-UNP-BRK.A-VMC-OLN-ACI0714.aspxC

Recovery Rides In On The Rails

This piece was posted early this morning on Investopedia. 
http://stocks.investopedia.com/stock-analysis/2010/Recovery-Rides-In-On-The-Rails-UNP-CP-CNI-NSC-CSX-BTU0518.aspx 

I strongly recommend Rail Times Indicators; it is an excellent source of information on what's going on with North American railroads.

If you really want to know what is going on in the economy, you cannot just look at the flashy headline economic data that comes out every month. You need to know what is happening at the "street level", and that is why I am a fan of following railroad traffic data.

According to data produced by the American Association of Railroads (in its monthly Rail Time Indicators report), U.S. carloads jumped almost 16% from the year-ago level and hit their highest number since November 2008. Likewise, Canada was quite strong - carloads jumped almost 27% annually and ended up at a level not seen since October 2008.

The rest of the article can be read at Investopedia: 
   http://stocks.investopedia.com/stock-analysis/2010/Recovery-Rides-In-On-The-Rails-UNP-CP-CNI-NSC-CSX-BTU0518.aspx

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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