Investment-Worthy Trend: Road and Rail Proves All It Needs To

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July 23, 2010

Are you one of the folks who thinks the economy is slowing down? Not that there’s not some evidence to that end, but to be fair, there’s plenty of evidence to the contrary. One such piece of evidence is railroad freight activity in the United States (as well as in Canada).

In June, the total rail traffic - intermodal plus carloads - in the United States averaged a total of 515,000 units per week, which is just 1.3% below May’s total levels. It’s still easily more than 10% above June-2009’s levels.

And in the meantime, we’ve actually seen the weekly rail numbers jump back to the strong levels that were so encouraging for the first half of the year’s; last week’s 227,000 intermodal units and the 282,000 carloads sent within the United States were right in line with the recent average. The chart speaks for itself.

The third piece of data on the rail shipping chart is cumulative ‘ton miles’ figure. As it suggests, trains cars (all types) multiplied by distance delivered equals a ton-mile…. the more, the better. Last week’s 30.8 ton-miles is just a fraction lower than the four month average, which has barely even budged that whole time.

No, rail freight demand isn’t waning, whether one wants to believe it or not. Canada’s rail market has remained just as stable.

That being said, were it just railroad activity showing reason for optimism, it might be easy to dismiss it as an anomaly. Trucking demand has remained just as firm though. In fact, according to the Cass Report, total shipping volume as well as total freight expenditures have actually trended higher each month this year including a June increase - well after the point where most investors thought the double-dip recession had begun. (Or if it has begun, then this shipping demand is an outright miracle).

While the earnings numbers for the prior quarter don’t guarantee the same success in the next (or current) quarter, they certainly aren’t meaningless either. Check out some of the recent reports from the rail as well as the trucking industry:

Werner Enterprises (WERN) generated a 65% increase in last quarter’s earnings
Knight Transportation (KNX) posted a 26% increase in last quarter’s earnings.
J.B. Hunt (JBHT) posted earnings of $0.40 per share last week, topping last year’s $0.23. Intermodal revenue was higher by 24%, on a 19% increase in volume.
Union Pacific (UNP) announced record-breaking earnings of $1.40 per share, beating Wall Street’s estimate of $1.21. All six of its business segments (automotive, intermodal, chemicals, agricultural, etc.) saw improved revenue and earnings.
Canadian National Railway (CNI) drove a 38% improvement of the prior second quarter’s per-share profit with income of $1.13. Analysts had only forecasted income of $0.99.
CSX Corp. (CSX) netted $1.07 per share, topping an anticipated $0.98. Revenue was up 22%; volume increased by 13%.

As for what lies ahead, most of the companies mentioned they were optimistic about future growth. Even the ones that we’re looking for a way to contain expectations had to concede there was - for one reason or another - something positive ahead.

For instance, Werner’s spokespeople commented “the improvement in the freight market has more to do with the failure of other trucking companies rather than rising demand”, which is unfortunate for the failed companies, but ultimately of benefit to Werner.

J.B. Hunt’s President Kirk Thompson, President said “Demand for transportation services has increased fairly dramatically as we have emerged from a multi-year freight recession… Across all segments demand was solid throughout the quarter with no evidence of renewed weakness. Shippers increasingly have exhibited concern about the supply/demand imbalance as their ability to secure adequate capacity has become more difficult.”

Werner especially cited a lack of drivers and a lack of accessible capacity as challenges; both point to a growing - not shrinking - demand that will ultimately dive prices upward, as the supply can’t grow as fast.

On the railroad side of the table, Canadian National nor any of the other rail outfits has to say a thing about the supply/demand dynamic that’s causing earnings to grow. The fact that Canadian National raised 2010’s earnings guidance (again) to a full 25% increase over 2009’s net income says it all.

It’s time for the long-termers to start looking at these stocks; the business is there regardless of whether or not the economy is supposed to be headed towards a recession again. And if we do skip the double-dip, the sky’s the limit for truckers and railroads.

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