(The Associated Press circulated the following on October 15.)
NEW YORK — Slumping demand and high fuel costs, coupled with concerns about the larger economy, are likely to weigh heavily on the railroads as they begin to report third-quarter results this week.
CSX Corp. kicks off the railroad’s earnings reports on Tuesday, followed by Union Pacific on Thursday.
Bear Stearns analyst Edward Wolfe said total carload volumes slipped 2.4 percent during the quarter, and have fallen 2.7 percent so far this year.
Across individual segments, intermodal shipments slipped as the third quarter closed, the analyst said. Intermodal, which involves transferring freight from one method of transport to another, is the largest segment for the railroads.
Automobile and metal shipments were also weak, Wolfe said. Paper and lumber, dragged down by a slumping housing market, remained weak throughout the quarter.
The last few weeks of the quarter showed modest improvement in coal and grain carload volumes and continued strength in chemical shipments, Wolfe noted. Shipments of coal, the second largest rail segment, rise 4.2 percent in the last week of the quarter, while grain carloads rose 3.2 percent for the week.
Chemical carloads rose 9.1 percent, driven by strong demand for ethanol and fertilizer.
Wolfe attributed the improvements in the latter part of the quarter to a relatively weak comparable period in 2006, as opposed to an uptick in demand.
The analyst continued to suggest that weakness in intermodal, which represents 40 percent of total carloads, is likely a bad sign for the overall U.S. economy.
He said current volume trends suggest there won’t be a pickup in demand anytime soon. Instead, the freight slump might last at least three to four more quarters, Wolfe said, and pricing should continue to weaken into 2008.
However, Wolfe still thinks railroad stocks will fare better than others across the transportation sector.
Wolfe rates all of the rails “Peer Perform” with the exception of Norfolk Southern, which he rates at “Outperform.”
Stifel Nicholaus analyst John Larkin noted that demand for U.S. rails has been especially poor, and that total volumes have been buoyed slightly by strength at Canada’s two major railroads, Canadian National Railway Co. and Canadian Pacific Railway Ltd. The strongest factors in slumping demand continue to be housing market weakness and a reduction in Asian imports, Larkin said.
The analyst said overall coal volumes are unlikely to regain much ground as stockpiles remain inflated across North America. Grain volumes, however, should continue to be driven by global demand for U.S. wheat, he said.
Larkin suggested that Canadian Pacific Railway should beat analysts’ expectations, while Canadian National Railway, Burlington Northern Santa Fe Corp. and Norfolk Southern Corp. should come in slightly below Wall Street’s expectations.