(The Associated Press circulated the following article on December 20.)
NEW YORK — The nation’s six largest railroads enjoyed arguably the greatest pricing power in their history this year and analysts expect it will continue in 2007, despite forecasts for a further slowdown in the economy.
“Pricing will continue to be the story next year,” said Peter Smith, a transportation equities analyst at Morningstar.
In fact, analysts are so bullish on industry pricing that they’re willing to look beyond recent softness in freight volumes. While total volumes so far this year are up 2.5 percent compared to 2005, according to the Association of American Railroads, the week ended Dec. 9 provided railroads with their first weekly volume increase after a string of double-digit declines.
Edward Wolfe, an analyst at Bear Stearns & Co., said on Friday that the softness will likely make fourth-quarter earning reports more challenging than the previous period when the big railroads exceeded expectations, but the long-term outlook remains robust.
For example, Wolfe estimates that U.S. railroads in particular stand to benefit as 20 percent to 30 percent of their long-term contracts with shippers remain unpriced and should command large increases and fuel surcharges as they renew.
“Our thesis on the rails remains that continued earnings power is derived principally from yields and productivity and not volume growth,” Wolfe said in a research note. “We continue to expect the rails to hold onto pricing.”
Yield refers to the revenue a rail company might earn on particular shipment. To maximize yield, railroads today strive to haul freight that commands the highest prices, even if that means sacrificing volume.
“Rails have moved away from cyclical industries like automotive and metals to intermodal and coal and agriculture,” Smith remarked.
Intermodal is probably the fastest growing segment of the transportation industry. Intermodal service comprises freight moving by way of at least two different modes of transport and usually involves the shipment of containers and trailers by rail, truck, barge, or ship. Five of the leading six railroads have already released their capital spending plans for 2007 and investment in intermodal service is high on their lists.
Since the largest U.S. ports are located on the West Coast and strong consumer spending has recently supported demand for products made in Asia, western rails like Burlington Northern Santa Fe Corp. and Union Pacific Corp. have benefited most by increasing their exposure to intermodal.
But that doesn’t mean others have missed out. For example, while total carloads for the major railroads are down 0.5 percent through the fourth quarter, intermodal carloads are up 0.9 percent. Canadian National Railway Co., which operates a 60 acre intermodal terminal in Vancouver, has witnessed 3.7 percent uptick in intermodal volumes thus far in the fourth quarter. Intermodal carloads at Burlington Northern, which announced plans last week to reopen an intermodal route between the Northwest and Memphis, are up 2.2 percent, and Union Pacific’s intermodal shipments have gained 1.6 percent. But predominantly eastern railroad CSX Corp. has also seen an increase of 1.6 percent in intermodal so far in the period.
Don Hodges, co-portfolio manager on the multi-cap Hodges Fund, said that on top of intermodal business he likes investing in railroads for their dominate position in hauling coal and grain. Hodges said coal will remain a prized commodity for its inexpensive price relative to natural gas and grain demand will only improve as the popularity of ethanol rises and exports to emerging countries like China and India increase.
“The only way to efficiently haul coal and grain is by railroad cars and there aren’t going to be any new railroads, so this is a growth industry,” Hodges said.