(The Associated Press circulated the following article on July 17.)
NEW YORK — Analysts are looking for solid quarterly results from North America’s major railroad operators, with strong pricing power, rising coal shipments and developing intermodal business offsetting higher fuel prices.
The positive outlook comes after shares of railroad stocks have fallen sharply in recent months.
Shares of Canadian National Railway Inc. have dropped 15.7 percent from their 52-week high set in March wile Canadian Pacific Railway Ltd.’s stock has fallen 18.5 percent from its 52-week high set in May, and shares of Burlington Northern Santa Fe Corp. are down 17 percent from their April 52-Week high.
Shares of Norfolk Southern Corp., Union Pacific Corp. and CSX Corp. have also retreated from 52-week highs set this spring.
Peter Smith, an analyst with Morningstar, said investors are using the stocks as a proxy for the economy, when in fact many railroad companies in recent years have insulated themselves against slowdowns.
“They still haul cyclical items like automobiles and chemicals, but now they’re to the point where they’re 50-50 between cyclical items and those that are more defensive,” Smith said.
David G. Ross, an analyst with Stifel Nicolaus & Co., said the recent slide is not indicative of railroad operators’ earnings potential.
“We’ve actually taken the opportunity to upgrade some stocks on the negative pricing,” he said.
When share prices in the sector went south in May, Stifel Nicolaus upgraded Burlington Northern, Canadian National and Norfolk Southern to “Buy” from “Hold.”
For the upgrade, the company cited competitive positioning of railroads in light of the trucking industry’s chronic driver shortage, increased highway congestion and a more challenging and costly regulatory environment.
Stifel Nicolaus also cited increased trade with the Pacific Rim and other developing countries, a rapidly growing demand for coal among utilities and other industries, and increasing demand among developing countries for U.S. grain. Intermodal business, where railroads carry goods between other modes of transportation, is also growing quickly.
As a result, major rail companies have been enjoying their best pricing environment in decades, and pricing, Ross said, is what drives earnings growth.
Capacity increases should also lag demand going forward, said Rick Paterson, an analyst with UBS Investment Research. A recent survey from UBS showed that the nation’s biggest railroads are running at 86 percent capacity utilization.
“The rail pricing story clearly still has legs,” Paterson said in a research note. “We do not expect to see a glut in capacity that would materially hurt the railroads’ pricing power.”
Many analysts also say rising diesel prices shouldn’t weigh on earnings either, as those costs get passed onto railroad customers in surcharges.
CSX kicks off the sector’s earnings reports on July 18.