(The Associated Press circulated the following story by Samantha Bomkamp on June 24.)
NEW YORK — Railroads, boosted this year by improving operational efficiency and strong pricing, have been hit hard in recent weeks as floodwaters in the Midwest battered tracks and halted shipments.
But while the ripple effects of the flooding still remain unknown, analysts say they remain optimistic for the long haul.
Severe weather has ravaged several Midwest states for weeks, leaving Iowa hardest hit. The flooding, which continued Tuesday as yet another levee broke on the Mississippi River, has killed 24 people, forced tens of thousands of people out of their homes and caused billions of dollars in damage.
Lehman Brothers analyst Gary Chase said that he does not expect the floods to have a major impact on earnings in the second quarter for the railroads, and suggested that higher fuel costs should be considered a larger threat to the group’s quarterly profits. He predicts that rising energy prices could cut earnings at Union Pacific by as much as 10 cents per share, while the railroad set the flood impact at about 5 cents per share.
Chase said Union Pacific and the rest of the rail group should see some “lingering effects” from weather through the rest of the year, but said it should do little to change his positive outlook on the group in the long term.
JPMorgan analyst Thomas R. Wadewitz said although the floods crippled rail networks and damaged infrastructure, the group’s strong pricing and earnings momentum should prevent the interruptions from having many long-term effects on shares.
In the second quarter, though, disrupted carloads and repair costs should hurt earnings across the U.S. rails, Wadewitz said. Union Pacific Corp. and Burlington Northern Santa Fe Corp., the nation’s two biggest freight railroads, steered down second-quarter earnings expectations last week, citing effects from the floods.
Total shipments by U.S. rails fell 4.4 percent last week, according to the Association of American Railroads. So far this year, freight volumes are up 0.6 percent.
The floods may also result in poor corn and soybean harvests in the fall, which could cut grain shipments beginning in the fourth quarter and lasting through the second quarter of 2009, Wadewitz said.
Union Pacific Corp. Chairman, President and Chief Executive Jim Young said at a conference last week that early estimates call for corn crops to be reduced by about 10 to 15 percent. A final government report on how many acres were lost is due out at the end of the month.
Agricultural products at Union Pacific made up about 17 percent of total shipment revenue last year.
Wadewitz expects Union Pacific to be harder hit than Burlington Northern by declining grain shipments because its business is more concentrated in the corn belt than Burlington Northern, which has deeper ties in Montana and the Dakotas.
Union Pacific expects to have most of its service restored by the end of the week, but predicts it might take more than a month to repair damaged tracks, yards and signal systems and resume normal operations.