Strong 1Q2011 for U.S. Railroads - Analyst Blog

A recent report of the Association of American Railroads (AAR), the main trade body of the U.S. Freight Railway industry, reported that the first quarter 2011 rail carload volume, excluding grain and coal, is up nearly 7.9% to 4.6 million rail cars compared with the prior-year quarter. Last year’s first quarter rose 9.3%.

However, fiscal 2010 was a turnaround year for the railroad industry after a huge downturn in 2009 due to the severe recession. The industry has achieved this result despite the severe winter storm during this period. Importantly, industry players are now more confident that this fabulous performance will get further momentum during the rest of 2011.

Freight rail is a “derived demand” industry — demand for rail services is tied to the demand for the products that railroads haul. Rail traffic, therefore, acts as a solid barometer of the overall health of the economy. Excluding coal and grain, rail cars generally ship all those materials, which are required as inputs for industrial production. Several industry researchers thus pointed out that the significant growth of rail car volume is actually indicating broader macro-economic improvement of the U.S.

With the U.S. gradually expanding, the fortunes of the railroad industry are also on the mend. Several railroad operators have expressed confidence that the growth rate of business volume in 2011 will exceed the U.S. GDP and industrial production growth rates.

Similarly, core pricing gain in 2011 will also exceed inflation. AAR reported that the freight railroads will spend a record $12 billion in 2011 for manpower recruitment, installation of new rail tracks and other capital projects. The railroad industry is expected to hire 10,000 new employees in 2011.

Our Recommendation

Currently, we remain Neutral on Union Pacific Corp. (UNP), Kansas CitySouthern (KSU), CSX Corp. (CSX), Norfolk Southern Corp. (NSC), Canadian Pacific Railway Ltd. (CP), and Canadian National Railway Co. (CNI). However, due to the strong growth momentum of the industry, our long-term view remains positive for all these Class 1 freight railroad operators.