The Association of American Railroads (AAR) continued to report gains in rail traffic in its November monthly report.  As holiday shopping season is off to a great start this year with retail sales up 16% during Thanksgiving weekend and online sales increasing by 26% on Black Friday compared to last year, the demand to move goods within the country will benefit freight carriers such as Norfolk Southern Corporation (NYSE:NSC), CSX Corporation (NYSE:CSX) and Union Pacific Corporation (NYSE:UNP).  Elevated fuel prices and limited truck capacity have also altered the way goods are transported in the economy, promoting railroads, which provide a sustainable solution to carrying goods at reasonable rates.
According to the AAR report U.S. railroad carloads increased by 2.3% and intermodal traffic was up 3.8% in November 2011 compared to last year. 13 of the 20 commodities tracked registered gains, with motor vehicles and parts, crushed stone, gravel and sand, and coal recording 18.7%, 12% and 1.3% gains respectively in comparison to previous year. As one of the major carrier of auto and vehicle parts, Norfolk is gaining from the pent up demand for automotive.
- Automotive Shipments: The Most Prominent Growth Area For Norfolk Southern This Year
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- Norfolk Southern’s Q1 2016 Earnings Preview: Decline In Shipment Volumes And Fuel Surcharge Revenue To Negatively Impact Results
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Holiday shopping, though delayed, looks promising this year, and we believe that railroads would benefit from the growth in volume of goods to be transported. FedEx had announced earlier this year that it will use rail intermodal services to move goods.
As delivery companies as UPS and FedEx use rail carriers to move their packages over long distances, we believe this may expose railroads to the cyclicity relating to consumer demand. In the current uncertain economic scenario in which slight negative news can make consumer retract, this trend is not too desirable for carriers that mainly ship more stable demand goods as coal, industrial and agricultural products.
Our price estimate for Norfolk Southern is $91, which is around 25% ahead of the current market price.Notes:
- AAR Reports Gains for November Rail Traffic, AAR News and Events [↩]
- Thanksgiving Sales Set Record as Shoppers With Jobs Chase Bargains: Retail, Bloomberg [↩]