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Railroad Stocks Coming Off the Rails

Railroad stocks are a great cyclical play. After all, as the economy moves higher, there are more goods moving around the nation and to the coast for export.

But it seems like that old word “uncertainty” has really put a damper on rail traffic lately — and subsequently is hurting rail stocks.

Yesterday, the Association of American Railroads reported substantial declines in weekly rail traffic — a 12% drop year-over-year for carloads and an 8% drop in intermodal traffic. The carload commodity groups posting the biggest declines included iron and steel scrap, down 29.3%; motor vehicles and equipment, down 20.6%; and coal, down 19.2%.

Those categories are telling. Auto sales are recovering nicely and many analysts see that as a broadly bullish sign … but does this signal a hiccup? And furthermore, energy commodities are crucial to rail volumes — especially coal, a key American export.

Total North American rail traffic also was disappointing, with combined volume down 10.1% compared with last year. Though Canada stayed firm, Mexican carloads were down 23.6% and container traffic fell 31.2% year-over-year.

To be clear, the holiday schedule plays a role here. The AR says that “traffic volume may have been impacted by the New Year’s holiday, which fell on a Monday and Tuesday in 2013, as opposed to Saturday and Sunday in 2012.”

However, the very steep drops are cause for concern.

Take this comprehensive chart from Orcam Financial Group, which focuses on intermodal traffic — that is, freight that uses rail and at least one other form of transportation (like an 18-wheeler) to reach its destination. This is perhaps the most telling category, because it often links real products with end users instead of coal to an export port or chemicals to a mega-manufacturer.

As you can see, the trend is decidedly downward.

Some rail stocks have mirrored this downward trend, too. CSX Corp. (NYSE:CSX) is down more than 9% in the past 12 months vs. 15% gains for the S&P 500. Revenue has fallen in its last two quarterly reports and is set to be flat at best in fiscal 2012 vs. 2011. CSX reports Q4 and full-year earnings on Jan. 21.

Norfolk Southern (NYSE:NSC) is down about 14% in the past year. It too has seen revenue flatline and is projecting a small decline in fiscal 2012 earnings vs. last year. NSC reports earnings Jan. 22.

However, not all railroads are hurting. Union Pacific (NYSE:UNP) is the largest domestic railroad by market cap and has seen revenue steadily increase every single quarter since the financial crisis lows. It’s tracking a modest 7% growth rate in the top line this year, and earnings could jump by as much as 25% year-over-year when Union Pacific earnings are reported on Jan. 23.

Also, Canada seems to still be a bright spot in the AAR data — and as a result, carriers like Canadian National Railway (NYSE:CNI) out of Montreal are doing well. CNI stock is up 22% in the last year, outperforming the broader market.

However, the intermodal traffic trends certainly are worrisome. The calendar is a convenient excuse for the shortfall last week, but if the AAR numbers continue to disappoint, it could be a sign of an overall traffic slowdown.

And more disturbing, continued lag in rail traffic is a harbinger of a broader slowdown for many segments of the American economy.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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