(The following column by Greg Sushinsky appeared at Investopedia.com on April 17, 2009.)
NEW YORK — While a large portion of the country prepares for (and, in some cases, has already begun) a rebound in the stock market, certain industries continue to plummet. Freight companies, like CSX Corp. (NYSE:CSX), are unfortunately among the latter.
CSX reported first-quarter earnings that dropped by 30%, as it carried lower freight volume. Revenue fell by 17% to $2.2 billion, while net income was $246 million, or 62 cents a share (down from $351 million, or 85 cents per share, in the previous year’s same quarter). The report showed the pressure the freight industry was under while CSX, the nation’s third largest carrier, continued with cutbacks and furloughs. The earnings did beat analysts’ estimates.
Rails are Still Central
Despite this being the virtual age, goods are tangible and must be made and shipped, so the transportation and freight industry is still critical. In mid-March, with the Dow Jones Transportation Average (DJTA) sporting the better part of its 40% rally, things were looking up. Union Pacific (NYSE:UNP) stock popped 5% after an upgrade with the idea that spring farm work would increase, along with an optimistic view that chemical and autos would rebound, yet the stock has been stuck for obvious reasons: the industrial uptick didn’t happen.
Burlington Northern Sante Fe Corp (NYSE:BNI) looked poised for big things. The railroad is nicknamed “The Buffett Railroad” for its famous investor, Warren Buffett, who was still picking up shares as recently as January to bring his stake in the railroad to 21.8%. Though the railroad has been described as “ailing,” the stock had a great fourth-quarter earnings report, unlike CSX, yet also has gone nowhere. The decent Burlington Northern earnings were largely from lower fuel costs and higher surcharges on its customers. How much pricing power the railroad will have going forward in this heavy recession is a matter of concern.
Canadian National Railway (NYSE:CNI) is still feeling the heat north of the border as it is also fighting to hold the line on earnings. The Canadian economy, which is rich in natural resources that are a staple for rail transport, is also tied heavily to the U.S. economy, and intimately so for Canadian National, as it has many routes which routinely criss-cross the U.S. in its daily business. There is potential for Canadian National to pull out of the rail doldrums first, if the Canadian minerals and forest products spring back before heavy industries or U.S. retailers do. (Learn more in Build Your Portfolio With Infrastructure Investments.)
Norfolk Southern (NYSE:NSC) had a similar story to CSX, in that it reported lower freight volume at the end of January but made out with pricing power. With all the major railroads reporting similar dynamics, it’s confirmed the industry-wide nature of the conditions and trends. Some, such as Norfolk Southern, may have managed around these conditions better than others, as its earnings increased 13% year-over-year in that fourth quarter. As good as Norfolk Southern is, neither they nor any of the other major railroads seem to have any special elixir for overcoming the ongoing slowdown in freight traffic.
Look for a Business Catalyst First
While lower fuel costs, improved pricing power and expert management can help the bottom line, the economy has to improve to reverse this trend. In addition to CSX furloughing workers, it’s putting some of its engine fleet temporarily down, so these are not signs of confidence in a short-term turnaround. Without a positive catalyst, the industry will remain in the same state. Meanwhile, CSX is seeking accommodations, should further trouble beset the automakers. While this is prudent planning, it’s not a sign of confidence in the near-term. (These diverse asset classes provide downside protection and upside potential, see Commodities: The Portfolio Hedge.)
Last Stop
Some observers have dire forecasts for the rails – specifically CSX – predicting the potential of a long-term negative trend, while others see the rails as still solid companies, which will weather this downturn just fine. Norfolk Southern seems to be the best, while CSX’s exposure to poor economic conditions has been a struggle. Investors shouldn’t just jump on board before looking at a sustainable rebound.