Kansas City Southern (NYSE:KSU) was the latest railroad company to warn of tougher times ahead, and with coal production uneconomical amid cheap natural gas, there’s no telling when KSU stock — or the rest of the sector — will come back.
KSU withdrew its revenue and volume forecasts because of “uncertainty” in the energy market.
By uncertainty, the railroad operator really means continued deterioration — at least as far as commodity transportation companies and coal miners are concerned.
The plunge in oil prices isn’t good for everyone. Cheaper gas and other input costs might be a boon for consumers and most business, but lower oil prices are clobbering KSU and the rest of the railroads, including Norfolk Southern Corp. (NYSE:NSC), Union Pacific Corporation (NYSE:UNP) and CSX Corporation (NYSE:CSX).
That’s because the plunge in oil prices extends to natural gas, as well, and that has power generators shun coal. Indeed, analysts estimate that 90% of all U.S. coal production is now unprofitable, as the market shifts away from coal to natural gas.
Coal traditionally has been the largest and most profitable piece of the transportation pie for railroads, and the drop in energy prices doesn’t stop there. Low prices have also stemmed the flow of oil from shale drilling, which is another commodity transported by railroads.
KSU Stock Is Not Yet a Bargain
Heck, as long as the dollar remains as strong as it is, the outlooks for KSU stock, UNP stock, NSC stock or CSX stock aren’t great. Commodities are priced in dollars and railroads predominantly transport commodities. As long as the dollar remains elevated, prices for oil and other commodities will stay depressed.
It also doesn’t help that cheaper oil is allowing trucking companies to take some share from railroads, as lower fuel prices let them lower prices while still maintaining margins.
Since KSU specializes in transportation between the U.S. and Mexico, the strong dollar is hurting it by making the peso weaker.
Lower coal shipments and a stronger dollar look to weigh on the railroad industry for some time, and that makes KSU stock, UNP stock, NSC stock and CSX stock look unattractive at current levels even after steep selloffs.
CSX stock is off 4% for the year-to-date, and it’s the winner of the group. NSC stock is down 11%, UNP stocks is off 14% and KSU stock has lost 22%.
Still, not everything is going against the industry. In the most recent quarter, KSU saw strong gains in revenue from shipments, chemicals, petroleum and cars, but those areas of strength can’t offset the pain caused by weakness in energy.
At some point, KSU stock and the rest of the railroad stocks will be beaten down enough to be bargains, but there’s too much uncertainty to call a bottom here. KSU cut its guidance in March before pulling it altogether in May.
More warnings out of the railroad industry in the weeks and months ahead will come as no surprise, which doesn’t bode well for railroad stocks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
