The latest report by the Association of American Railroads released on March 29, shows mixed trends in U.S. railroad traffic this quarter as coal witnessed a decline in volumes. Carload volumes were down 2.2% while intermodal volumes increased by 2.4% for the past 12 weeks compared to same period in 2011.^[1] The fall in carloads could translate into softer earnings for some U.S. railroad companies like CSX Corporation (NYSE:CSX) while Union Pacific Corporation (NYSE:UNP) should benefit from the increase in intermodal transport. Last year, U.S. railroad companies including Norfolk Southern Corporation (NYSE:NSC), CSX and Union Pacific saw double-digit growth in revenues and earnings.

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Coal volumes decline, automotive up

The decrease in rail traffic was primarily driven by declines in coal volumes, which were down 9% from the same 12 week period in 2011. This decline offset gains in motor vehicles and petroleum products, which were up 18.9% and 27.5% respectively.

Until now coal has dominated carloads volumes; however its usage in electricity generation has suffered a major blow following the EPA’s new regulations which virtually bars new coal-fired power plants. We discussed this issue in our recent article EPA’s New Regulations Hit Railroad Companies, Could Boost Coal Exports. CSX stands to lose the most in the short-term if coal volumes continue to slide as coal makes up about 32% of our $27 price estimate for the company’s stock.

On the other hand, Norfolk, the biggest carrier of autos and vehicle parts, stands to gain from pent-up auto demand. Moreover, some recent encouraging economic reports could provide some momentum for the transportation industry as volume growth is largely dependent on economic expansion.

Union Pacific has an edge on its competitors when it comes to intermodal freight, which contributes about 22% of our $115 price estimate for the company’s stock. Intermodal volumes were up mainly on the back of 4.4% growth in container volumes.

Possible re-regulation of the industry

Last year, even though volumes only increased slightly, freight carriers’ revenues and earnings showed double-digit increases due to higher revenues per unit (RPU). However, the Senate Commerce Committee’s efforts to reform federal rail policy could have adverse effects on the rail industry if changes are made to the discretionary pricing policies allowed under the Staggers Rail Act. The Committee has proposed an amendment that would re-regulate the rail industry, effectively removing its antitrust exemption. Our analysis does not incorporate the impact of any potential future regulatory changes, but should significant reform take place we would likely revisit our RPU estimates.

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