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I always chuckle when flight crews announce it's time to deplane. With the recession picking up steam in North America, could it be time to de-train for a while?
A common thread of decreasing demand throughout the rail sector is becoming all the more compelling. The latest in the industry to report earnings, Canadian National Railway (NYSE: CNI ) , beat analyst expectations with a 20% increase in adjusted earnings over the fourth quarter of 2007 and a 13% increase in revenue.
Beyond these earnings, however, is eroding demand that may take many Fools by surprise in the future. I have highlighted my concerns about declining volume and fuel-surcharge lags at competitors CSX (NYSE: CSX ) and Burlington Northern Santa Fe (NYSE: BNI ) . Union Pacific (NYSE: UNP ) told a similar story this week. With only minor variations, I believe Canadian National is in the same boat.
Despite some significant weakness over the past six months, the rail carrier stocks as a group have outperformed the S&P 500 over the past 12 months, but I don't see how the group will maintain that relative strength. Eventually, a monumental stimulus package from the Obama administration could help stabilize the situation, but until those programs become reality, I see a difficult near-term outlook for these stocks.
Both rail industry data and the commentary in various earnings reports confirm that there's less demand for rail freight, and the problem is becoming much worse. Compared with volume declines of 7% reported by Burlington Northern and 10% reported by both CSX and Canadian National for the fourth quarter, recent data show that the past four weeks brought volume declines of more than 20% over the same period a year ago. Demand for moving grain and forest products, both key freight categories for Canadian National, is off by more than 30% during that period.