(The following article by Will Deener was posted on the Dallas Morning News website on December 16.)
DALLAS — If there is a front line of U.S. economic activity, it might be in the sprawling Fort Worth rail yards of Burlington Northern Santa Fe Corp., one of the nation’s largest railroad companies. It’s the nerve center for the company’s 220,000 rail cars carrying coal, cars, clothing and grain along thousands of miles of track in 28 states.
Business is booming at the rail yards, and so are the stock prices of Burlington Northern and other rail and trucking companies.
“Railroad and trucking companies are the direct beneficiaries of the continued strong economic demand in the U.S.,” said Donald Broughton, transportation analyst at A.G. Edwards Inc. in St. Louis.
Investors have taken notice. Burlington Northern shares have soared from $30 in 2004 to a close of $67.22 Thursday.
Similarly, the stock price of another large rail company, Norfolk Southern Corp., is up about 20 percent this year.
And a big chunk of those gains has come in the past month.
Until recently, railroad companies had been out of favor with investors for the better part of 30 years. Stocks of trucking companies are beginning to attract attention now, too, although a chronic shortage of drivers continues to drag on that industry.
The general good health of the economy certainly undergirds the performance of Burlington Northern and other railroad companies. But there are other important components to the recent surge.
First, demand for coal has increased dramatically as electric utilities rely more on coal-fired plants, Mr. Broughton said.
And rail is the primary mode of transportation for coal.
“The cheapest way to generate a kilowatt-hour of electricity is coal,” Mr. Broughton said. “As natural gas prices have increased, it has forced utilities to generate more power using coal.”
Coal
About 90 percent of the coal that Burlington Northern hauls comes from the Powder River Basin in Wyoming and Montana.
This type of coal especially is in demand because of its low sulfur content.
Electric utilities can meet federal clean-air standards with Powder River coal, Mr. Broughton said.
Burlington Northern spokesman Joseph Faust said coal now accounts for about 20 percent of the company’s annual revenue of about $11 billion, and he doesn’t expect freight shipments to slow next year. The company’s earnings were up 37 percent last year and are on track to grow 40 percent this year.
Second, the number of so-called intermodal shipments – truck trailers and containers transported by rail – continues to grow.
That’s mainly because of Asian imports offloaded in containers in the port of Long Beach, Calif., and then transported by rail throughout the United States.
Mr. Faust said Burlington Northern last year transported 4.5 million containers and truck trailers.
The average Burlington Northern intermodal train moves the equivalent of 280 trucks, he said.
This freight is typically shipped via rail rather than trucks because of “limited transportation capacity, including highway congestion and truck driver shortages,” Mr. Faust said.
Don Hodges, portfolio manager of the Hodges fund, a Dallas-based mutual fund, said he has been loading up on rail and truck stocks for months now.
In fact, they are among his fund’s largest holdings and best performers.
“Transportation stocks aren’t sexy, and nobody seems to want to talk about them. It amazes me how investors still like Cisco and Lucent and those kinds of names,” Mr. Hodges said.
“But when people are not paying attention, that’s when I make money.”
For example, the average daily trading volume in Lucent Technologies Inc. is 43 million shares. That’s an astounding amount of trading in a company whose stock price is down 25 percent over the past year. Many of the rail and trucking companies don’t even trade 1 million shares daily, even though they are profitable and have excellent prospects.
One of the nation’s best performing trucking companies, USA Truck Inc. in Van Buren, Ark., trades only 124,000 shares daily, and yet its stock price has galloped from about $10 to almost $30.
Even the stock prices of some of the long-suffering airlines – the transportation sector’s stepchild – have begun to move higher. In fact, shares of Fort Worth-based AMR Corp., parent of American Airlines, have doubled in the past three months, from about $10 to above $20.
Trucking
Some transportation stocks – especially those of the trucking companies – dipped a bit this year as fuel costs soared.
Shares of Yellow Roadway Corp., one of the nation’s largest truckers, dropped from just above $60 in March to $40 by September. Yellow closed Thursday at $44.66.
But Mr. Hodges said he viewed the sell-off as a buying opportunity, because he doesn’t foresee a let-up in demand anytime soon.
“My average cost in Yellow Roadway shares is about $49, so I’m down some with this company, but the truckers are beginning to get pricing power, so I’m going to hold on,” Mr. Hodges said.
Both trucking and rail companies are now passing through most of their higher fuel costs with surcharges as demand continues to surge.
“A few years ago truckers had to eat the price of fuel,” he said. “They don’t have to do that anymore. That tells you that there isn’t much competition left out there.”
Drivers’ role
Thousands of trucking companies went out of business during the last recession, in 2001. And even though the economy has been expanding for three years now, much of that lost capacity never returned.
“Normally, you would see trucking companies adding more trucks during a recovery, but this time the capacity has remained constant, and demand keeps rising,” said Robert Dunn, trucking analyst at Sidoti & Co. in New York.
There’s no point in buying more trucks if there aren’t enough drivers, he said. It’s hard to attract new drivers because they have to spend so much time away from their families, he said.
“Now trucking companies are cannibalizing drivers from each other,” Mr. Dunn said.
Because of this, he said, investors should stick with the larger trucking companies because they can hire and retain drivers by paying higher salaries.
Generally, analysts prefer firms like J.B. Hunt Transport Services Inc. and Werner Enterprises Inc.
Even investors who shy away from these so-called old-economy stocks should always pay attention to the sector as an early indicator of where the economy is heading.
“The movement of goods by rail and truck – the volume and velocity – has been a great economic indicator,” Mr. Dunn said. “And right now the signs are the economy is expanding nicely.”