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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.