(Dow Jones Newswires circulated the following article on October 14.)
CHICAGO — Third-quarter earnings for the four largest U.S. railroad companies are expected to get a boost from volume growth and solid pricing.
Volumes have benefited from a growing economy and strong demand for some of the products the rails carry. Although third-quarter volumes may come in weaker than some on Wall Street anticipate, they remain strong enough–particularly in coal, intermodal transport and grain–to lead to considerable pricing increases.
Railroads typically enter their peak season toward the end of the third quarter, as products for the coming holiday season begin arriving at ports. Though the current peak season has gotten off to a slow start, the latest numbers from the Association of American Railroads show an increase in volumes in the past few weeks.
Intermodal volume rose 5.4 percent in September compared with the same period last year, while carload volume increased 0.3 percent during that same period, AAR said.
Intermodal is the movement of freight by two or more modes of transportation, such as ships and railroads or railroads and trucks. Carload describes a car that’s loaded to its weight or space capacity.
Although volume growth for Union Pacific Corp., Burlington Northern Santa Fe Corp., CSX Corp., Norfolk Southern Corp., Canadian National Railway Co. and Canadian Pacific Railway Ltd. was mixed for the quarter, in total it rose 3 percent from the year-earlier period, Merrill Lynch analyst Ken Hoexter estimated in a recent research note.
The increase is “solid,” Hoexter said, but shy of his 3.8 percent target due, in part, to a September landslide that led to a major service disruption for Norfolk Southern in Pennsylvania.
In addition to strong intermodal volumes, non-economically sensitive commodities such as grain and coal remain in solid demand, Hoexter said. The strength in those areas helped offset weakness in forest products and autos, he noted.
High single-digit intermodal growth and near double-digit coal growth helped Burlington Northern Santa Fe lead the group in volume growth, rising a “robust” 7.6 percent, Hoexter said. Union Pacific followed at 3.4 percent, he added.
Although coal and intermodal volumes will increase from the year-earlier period at CSX, Hoexter said weakness in auto, forest products and metal volumes led him to lower CSX’s volume growth estimate to 2.9 percent from 3.4 percent.
Hoexter lowered his volume growth estimate for Norfolk Southern to 0.6 percent from 0.9 percent.
Union Pacific’s volume will, among other factors, also benefit from coal, A.G. Edwards analyst Donald Broughton said.
Solid pricing is the other driver behind the expected solid earnings for railroads during the third quarter. BB&T Capital Markets analyst John Barnes expects pricing growth of 5.8 percent during the quarter for the rail stocks he covers, although in a recent research note he said the growth could come in stronger.
During the second quarter, pricing increased a “robust” 7.7 percent on average for the rail stocks that Barnes covers. “We believe that could translate into further stock price appreciation this quarter, so that’s why we remain buyers.”