(The Associated Press circulated the following story by Samantha Bomkamp on September 6.)
NEW YORK — A slumping housing market and weak auto sales have taken their toll on the railroads, with volumes continuing to fall throughout the third quarter and few signs of an uptick in demand anytime soon.
Morgan Keegan analyst Art Hatfield said demand for rail carloads has fallen 2 percent so far this quarter, following a 3.3 percent overall decline in the second quarter. This comes at a point where the industry typically sees the ramp-up toward a pre-holiday peak.
Demand for coal carloads has slipped 1.6 percent so far this year, while forest products, tied to the suffering housing market, again posted weak numbers with a 12.6 percent year-to-date decline, Hatfield said. Automobile carload volumes seemed to be improving in late August, but Hatfield said this was likely the result of comparisons with year-ago weakness.
Chemical carloads remained a lone bright spot, rising 2.9 percent in the first eight months of 2007.
Perhaps the greatest concern was the drop in demand in intermodal carloads, the largest segment of railroad cargo and which involves moving freight from one form of transportation to another, such as ships to railroads or from railroads to trucks for final delivery. Intermodal volumes fell 1.7 percent in the quarter, and 11.7 percent so far this year, hampered most significantly by an increase in truck capacity and slowing imports.
Because intermodal volumes tend to go hand-in-hand with retail sales and other such economic indicators, Bear Stearns analyst Edward Wolfe said shrinking intermodal volumes are “likely a bad sign for the U.S. consumer.”
“We still see few signs, if any, of a near term improvement in demand,” Wolfe said.
But investors shouldn’t write the rails off, Wolfe urged. The “Big Six” railroad stocks are outperforming the broader market year-to-date, having grown 14 percent so far this year compared to a 5 percent gain for the Standard & Poor’s 500.
Moreover, the analyst forecasts a strong pricing environment and said the rails are able to use higher productivity to lift their earnings despite an ongoing period of economic uncertainty.
Specifically, Norfolk Southern Corp. should outperform the other members of the Big Six over the next six months to a year, Wolfe said. In addition to Norfolk Southern, the group includes Canadian National Railway Co., Burlington Northern Santa Fe Corp., CSX Corp., Canadian Pacific Railway Ltd. and Union Pacific Corp.
So far this quarter, Norfolk Southern’s volumes have been among the best in the group, second only to Union Pacific Corp.
Union Pacific and CSX Corp. have led the group in year-to-date comparisons, though, which Wolfe touted to investors belief that the pair presents better pricing opportunities than the group overall.
However, Wolfe suggested that that new leaders might emerge from the Big Six as investors begin to pay increasingly more attention to the stocks with larger potential for growth.
But as a group, railroads face a tough time ahead in the near-term, with government action concerning rail pricing and safety initiatives.
Over the next six months, Wolfe said Congress will be considering legislation aimed to improve railroad safety. Also, the Surface Transportation Board, an economic regulatory agency affiliated with the U.S. Department of Transportation, could make changes to the railroad’s pricing structure as it attempts to resolve some ongoing rate and service problems.
For the long-term, however, Wolfe expects increasingly favorable government action toward the rails, as regulators turn to the tracks as a means to decongest highways and reduce fuel dependence.