The Burden You Don't Want to Carry

Railroads are accustomed to carrying heavy loads. Someday, North America's railroads will emerge from this downturn as the lean and efficient transporters they are; in the meantime, though, Fools may not wish to shoulder the sector's heavy burden.

Canadian National Railway (NYSE: CNI  ) , the second operator to offload earnings for the first quarter, chugged along with flat adjusted earnings and a modest 3.5% drop in revenue from the prior-year period. The company pointed to a stronger U.S. dollar as the primary "shock absorber" for the continued economic malaise that sent total freight volumes for the company tumbling 16%.

What Canadian National calls shock absorbers, however, I referred to as lifelines within my cautionary outlook for the railroad sector back in January. Both fuel surcharges and relative strength in coal demand have since been used up for now, as I predicted. Although I became a whipping post of railroad fans for sounding the alarm, stocks in the sector fell substantially thereafter, before rallying more recently.

Given the challenges ahead, I believe this railroad rally was premature, and I reiterate my cautionary tone. Canadian National was fortunate to find one last respite in the form of a stronger U.S. dollar, but the impaired fundamental underpinnings of the greenback suggest that this lifeline won't last long. For the first quarter, Canadian National realized about 10% of its adjusted net earnings from the resulting currency conversion effect. Despite laudable efforts to operate efficiently in a very challenging environment, both CSX (NYSE: CSX  ) and Canadian National have reported rising operating ratios as freight volumes dropped sharply.

Speaking of freight volumes, recent data does not exactly foster confidence in the near-term outlook. Using a four-week rolling average, total North American traffic volumes are down nearly 20% from a year ago. This week alone, the contraction has reached beyond the 24% level for both Canadian National and the industry at large. Peabody Energy's (NYSE: BTU  ) recent earnings report helped Fools to understand what's happening in coal. As for forestry and agriculture -- two industries of particular importance to Canadian National -- curious Fools may wish to track results from companies like PotashCorp (NYSE: POT  ) and Weyerhaeuser (NYSE: WY  ) for greater insight.

I will present a more holistic analysis of the railroad industry once results from competitors Norfolk Southern (NYSE: NSC  ) and Burlington Northern Santa Fe (NYSE: BNI  ) are in, but in the meantime, I advise approaching the sector with caution.

Further Foolishness:

Nearly 1,300 Motley Fool CAPS members, including 424 All-Stars, expect CNI to outperform the S&P 500. In all, the CAPS community has shared its collective insight on 35 "road and rail" companies. Join the free CAPS community today and share your views on how the rail industry will fare throughout the current financial crisis.

Fool contributor Christopher Barker has never hopped a freight train, but he thinks it would be a fun place to learn the harmonica. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Peabody Energy. Canadian National Railway is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy named Thomas, from the island of Sodor.


Read/Post Comments (7) | Recommend This Article (10)

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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.

  • Report this Comment On April 21, 2009, at 5:26 PM, JGBFool wrote:

    "stocks in the sector fell substantially thereafter, before rallying more recently."

    Pardon my asking-- what sectors DIDN'T fall substantially after 1/29, before rallying more recently?

  • Report this Comment On April 21, 2009, at 6:35 PM, XMFSinchiruna wrote:

    JGBFool,

    Thanks for the question.

    By tracking multiple economic indicators that ran contrary to the prevailing optimism of that timeframe (first days of the new administration), I predicted the lower share prices against the prevailing sentiment of investors. Hopefully, in the process, I helped traders to execute a handsome trade; or long-term investors to obtain a more favorable entry price. Had my analysis been based upon a whim rather than supporting evidence, then I think your question would be more to the point. :)

    Also, as I mentioned in this article in January:

    http://www.fool.com/investing/general/2009/01/29/railroads-b...

    ... the pitfalls I saw looming for the sector were / are macroeconomic in nature, so it is no surprise at all that many other sectors were likewise affected by the deteriorating state of the domestic economy. Since railroads are a critical bellwether industry, data can indeed be predictive of much broader economic trends affecting multiple sectors.

    Now, once again, I see those railroad data with corroborating indications from client industries pointing sharply downward. The twisted tracks I see ahead for the railroad industry, then, can again be interpreted as suggesting another chapter of contraction in the domestic economy overall.

    These are my opinions and mine alone, please DYODD.

  • Report this Comment On April 22, 2009, at 11:24 AM, Brettze wrote:

    Why cannot any of those railroads think of new markets to boost revenues? I have an idea.. Instead of riding a train as a passenger, I can drive up and park my car on a train and stay in my car as I travel cross country sightseeing toward destinations.. I would save wear and tear on my car from distance travelling on the highways. I will not need to rent a car at the destination points. I can guarantee you that many people would want that kind of train service... I want it...

  • Report this Comment On April 22, 2009, at 11:25 AM, Brettze wrote:

    It would be great for RVers as well.. This will keep RVs out of the highways..

  • Report this Comment On April 22, 2009, at 12:01 PM, farmnut1985 wrote:

    It would be interesting to see what it would cost for them to do that, sounds like a good research point. There would be some excess costs and issues however as to liability insurance. I don't think they would let you stay in your vehicle though as you may need a restroom somewhere along the way.

  • Report this Comment On April 22, 2009, at 12:17 PM, Brettze wrote:

    Whatever as long as I can take my damn car with me to destinations by any damn train! Be it CSX, Northern whatever!! Armtrak is for passengers, so shove it!!

  • Report this Comment On April 22, 2009, at 12:18 PM, Brettze wrote:

    Restroom, my ass!!

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