Less Gravy on the Train

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.

Given all that, as I reminded Fools while urging caution about earnings from miners such as BHP Billiton (NYSE: BHP  ) , near-term weakness and long-term opportunities can indeed be bedfellows.

Further Foolishness:

More than 1,200 Motley Fool CAPS members, including 290 All-Stars, expect Canadian National Railway to outperform the S&P 500. The CAPS community has shared its collective insight on 35 road and rail companies. Join the free community today and share your views on how the rail industry will fare.

Fool contributor Christopher Barker reminds Fools that the word disembark is perfectly adequate to describe getting out of any type of vehicle. He can be found blogging actively and acting Foolishly in CAPS under the user name TMFSinchiruna. He owns shares of BHP Billiton. Canadian National Railway is a Motley Fool Stock Advisor pick. The Fool's disclosure policy is not about to de-anything.


Read/Post Comments (0) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 816110, ~/Articles/ArticleHandler.aspx, 9/1/2014 3:41:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement