(FROM THE WALL STREET JOURNAL 4/13/15)
By Laura Stevens
Will the railroads, darlings of the freight transportation
sector for the last several years, finally lose steam?
Beginning late Tuesday, when CSX Corp. posts first-quarter
results after the market closes, investors will be scouring the
coming round of earnings reports for signs that the railroads were
able to raise prices to offset disappointing cargo volumes in the
latest quarter.
Stock prices for the group fell 8% in the first quarter on
average as concerns about lower volumes mounted. They've dropped a
total of about 12% since peaking last fall. Now analysts are
growing concerned that the weaker volumes indicate the economy
might be showing signs of softening just as the railroads should be
reaping the benefits of their more than $50 billion in capital
spending over the past two years.
Total U.S. carload volume grew only 0.2% in the quarter, while
some categories like coal and metals fell, according to data from
the Association of American Railroads.
"Volumes were sluggish in the first quarter, and the railroads
are all going to have an extremely difficult comparison for the
second quarter," making for a rough start to the year, said Jason
Seidl, a rail analyst with Cowen and Co.
In February Genesee & Wyoming Inc. warned that traffic was
weaker than expected. Then last month, Kansas City Southern lowered
its first-quarter and full-year guidance, just weeks after
describing a somewhat rosier picture at an investors
conference.
Both attributed the weakness, in part, to a further downturn in
coal shipments. When the price for natural gas falls below about
$3, power plants typically switch to gas from coal. Coal exports
were already weak, and volumes in the first quarter were down 2.5%
to 1.29 million carloads, according to the AAR. Coal amounted to a
fifth of total rail traffic for the quarter.
The even lower-than-expected coal volumes came as a surprise to
the railroads, which on average earn about 15% of revenues from
coal. CSX CFO Fredrik Eliasson said at a March 4 investors
conference that the company adjusted expectations for the year's
domestic coal shipments from flat to a decrease of at least 5%.
Norfolk Southern Corp. President James Squire at the same
conference called coal a "soft spot," adding it was down 7%.
Kansas City Southern said its business is also negatively
affected by lower than expected crude oil growth this year. Trains
carrying petroleum and related products grew by only 0.4% in the
first quarter, according to the AAR, as lower energy prices made it
less desirable to invest in drilling more U.S. wells, a trend
that's expected to continue.
BNSF Railway Co., which is responsible for about 70% of U.S.
oil-train traffic, operated as many as 10 trains a day last year,
but is averaging nine a day now out of about 500 trains overall a
day, a spokesman said.
"Energy is a small piece of what these railroads haul -- it's
less than 5% of total revenues -- but it's a big driver of growth,"
said Justin Long, an analyst with Stephens Inc. Oil-related traffic
grew 13% in 2014, he added.
Analysts said that a number of other outside factors are causing
concern, including the weakening dollar, which may stunt exports,
as well as congestion still clearing up at the West Coast ports,
affecting the U.S. supply chain. Transporting intermodal containers
-- which can also be carried on a tractor trailer -- has been a big
piece of railroads' growth over the past few years.
CSX said at the March conference that its domestic intermodal
business was up 12% while international intermodal was down 4% due
to the West Coast port problems. Union Pacific's international
intermodal business was down 22% year-to-date at that time, while
Norfolk Southern also said it experienced some ripple effects,
including an increase from East Coast ports. BNSF is also expected
to be hard hit as a West Coast player.
Lower railroad volumes can signal a softening economy as demand
falls for everything from manufacturing materials to retail goods.
"We've had this massive, long-dated bull run in rail stocks, so
anytime there's any concern, people wonder whether the good times
are over," said Mark Levin, an analyst with BB&T Capital
Markets.
Still, some analysts are hopeful that the railroads will be able
to offset volume weakness with higher prices this year. Barclays
analysts said that the sector has surprised in the past, reporting
gains due to both productivity and pricing even as cargo volumes
fell.
Analysts expect CSX to earn 45 cents per share for the first
quarter, compared with 40 cents per share during the same period a
year ago. Revenue is expected to be flat at $3 billion.
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The Week Ahead looks at coming corporate events.
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A Look Ahead / Happening This Week
MONDAY
MIPTV, an entertainment conference, begins in Cannes,
France.
TUESDAY
Retail sales.
Earnings: Intel, Johnson & Johnson, J.P. Morgan Chase, Wells
Fargo, CSX
WEDNESDAY
Industrial production.
Earnings: Bank of America, Delta Air Lines, Netflix, PNC
Financial Services
THURSDAY
Earnings: American Express, BlackRock, Blackstone, Citigroup,
Goldman Sachs, Mattel, Philip Morris International,
UnitedHealth
FRIDAY
Consumer-price index.
Earnings: General Electric, Honeywell
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