AAR Reports Mixed Weekly Rail Traffic As Coal Volumes Sink

The latest report by the Association of American Railroads released on May 10, shows mixed trends in U.S. railroad traffic this year as coal volumes continue to witness decline. Overall, carload volumes were down 3.2% while intermodal volumes increased by 2.8% for the past 18 weeks compared to same period in 2011. ^[1] But, the continuous decline in carloads coupled with recent correction in fuel prices could translate into softer earnings for some U.S. railroad companies.

Recently major railroads such as CSX Corporation (NYSE:CSX) and Norfolk Southern are seeing their stocks going south in tandem with stock market, we believe their prospects are bright. Union Pacific Corporation (NYSE:UNP) has not seen much action due to high exposure to intermodal and energy. Below we take a look at how volume trend could impact value of these companies.

See Our Full Analysis for: CSX Corporation | Norfolk Southern | Union Pacific

Heavyweights Weigh Down Automotive, Petrochemicals Growth

Utility coal still dominates carloads volumes when compared with other commodities.  It is increasing losing market share to attractive low priced natural gas. This has led to declines in coal volumes, which were significantly down 11.3% from the same 18 week period in 2011. The EPA’s new regulations which virtually bars new coal-fired power plants will also hurt coal demand. Barring an unforeseen jump in natural gas prices, we expect coal volumes to remain weak in near term. CSX stands to lose the most in the short-term if coal volumes continue to slide as coal makes up about 30% of our $28 price estimate for the company’s stock.

Another heavyweight chemicals volumes are also down 0.7% this year. These declines have offset gains in motor vehicles and petroleum products, which were up 19.9% and 32.6% respectively. We expect automotive volumes to keep shining as eventual recovery boosts consumer confidence. Amongst railroad companies, Norfolk, the biggest carrier of autos and vehicle parts, stands to gain from pent-up automotive demand. Automotive makes up about 9% of our current $85 price estimate for the company.

Intermodal Continues to Grow

Intermodal volumes were up 2.8% mainly on the back of 4.8% growth in container volumes. While we believe intermodal volumes for exports may continue to remain under pressure due to strengthening of the U.S. dollar, domestic growth with continuing truck conversions will more than offset the losses. Union Pacific has an edge on its competitors when it comes to intermodal freight, which contributes about 22% of our $114 price estimate for the company’s stock.

Last quarter, railroads saw double-digit growth in revenues and earnings mainly on core pricing gain as well as increase in fuel surcharge. While we believe them to show significant revenue growth, a recent fall in fuel prices could result into a reduction in fuel surcharges offsetting some of the gain.

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1. AAR Reports Mixed Weekly Rail Traffic, AAR Press Release, May 10 [↩]