Resurgent carload and intermodal volumes has freight rail stocks looking increasingly attractive in 2011 – or perhaps after the tumble in railroad stocks in recent years, at least a little less like Boxcar Willie. Economic recovery has helped major railroads like Union Pacific (NYSE: UNP) CSX Corp. (NYSE: CSX) and Norfolk Southern (NYSE: NSC). All three railroad stocks have posted decent gains lately. But for any transportation company, there’s no short route for bouncing back from a deep recession — and while there are good reasons to be optimistic about growth in rail freight earnings today, they still must seek out ways to hold their value over the long haul.
Like parcel volume for carriers like United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX), rail freight is a bellwether of the U.S. economy because it is tied to demand — lower demand equals lower traffic and lower revenue. So it’s no secret that the recession hit the freight rail sector hard — 2009 was the worst year for freight railroads since 1988. According to the Association of American Railroads (AAR), U.S. rail carloads declined 16.1% in that year alone, while intermodal dropped 14.1% to its lowest level since 2002.
But last year’s economic rebound has freight railroads singing a new tune. Freight rail traffic grew slowly, but steadily, in 2010. Additionally, two key measures of volume posted significant gains last month, AAR reported on Tuesday. Monthly carloads in January 2011 increased by 8% compared with the same month last year and intermodal traffic was up 7.4%. Combined carloads and intermodal traffic have posted year-over-year growth in each of the past 13 months, an indication that rail traffic gradually is starting to rebound.
If the recovery stays on track, that’s great news for these major publicly held, Class I railroads: CSX Transportation (NYSE: CSX), Norfolk Southern Railway (NYSE: NSC) and Union Pacific Railroad (NYSE: UNP). All three of these rail freight companies posted dramatic increases in earnings in the fourth quarter of 2010 – CSX profit rose 42%, Union Pacific was up 41% and Norfolk Southern was up 31%.
Even more significant, their share prices are up dramatically over a year ago: CSX share prices have increased 56%, Union Pacific rose 46% and Norfolk Southern is up 26%. With all three companies seeing a continued rise in profitability in 2011, it’s likely that stock prices will continue to rise — though perhaps more modestly — in 2011.
But another factor has the potential to boost rail freight earnings even higher — rising crude oil prices.
Here’s why: although railroads, which fuel their locomotives with diesel fuel, are not immune from sticker shock, they have made huge strides to boost fuel efficiency by a whopping 85% since 1980. The use of double-stacked freight containers further reduces costs.
Additionally, railroads have found it easier than have competitors in air cargo and non-parcel truck transport firms to pass on higher fuel costs directly to shippers. That gives railroads an edge over those companies.
Rail transport also might be a way to better move excess oil supply from places like North Dakota. There, according to Reuters, a barrel of light crude was selling for $81/barrel last week compared to the Gulf Coast, where the price was $104/barrel. The added cost per barrel for the 1,600-mile rail trip to move North Dakota oil to Louisiana: about $7/barrel. So if the hike in oil prices doesn’t kill the recovery by depressing the demand for shipping, investors could be singing love songs about rail freight companies in 2011, as their improving traffic volumes boost share prices.
As of this writing, Susan J. Aluise did not own a position in any of the stocks named here.
