I think these train tracks must run in a giant circle.
Didn't we just hear another train conductor declaring that we've seen a bottom in North American freight traffic woes during the second quarter? Since geography and freight mixes render each railroad fairly distinct, however, it's important to treat each operator separately. Canadian National Railway (NYSE: CNI ) this week became the second operator to call a bottom.
When CSX (NYSE: CSX ) offered its declaration last week, I couldn't help considering events such as the General Motors bankruptcy, cautionary statements from a steelmaker CEO, and the mounting deterioration of domestic coal demand as potential contradictions to CSX's call.
In the case of Canadian National Railway, however, despite my firm conviction that the overall U.S. economy may have slowed its descent without reaching any manner of a bottom, the opportunist inside me can't help noting the peculiar strengths of this particular rail operator. Let's begin by looking at the quarterly earnings, which absorbed a 22% decline in freight volumes with only a 15% drop in revenue and a 16% hit to the bottom line.
Displaying the kind of profitability that will be key to weathering this protracted downturn, the company's operating ratio of 67.3% was substantially leaner than CSX's reported 73.4%.
In a most fortunate development, Canadian National recently acquired some of the export-bound coal traffic from Teck Resources (NYSE: TCK ) from rival Canadian Pacific Railway (NYSE: CP ) , following a rate dispute. Teck is the second-largest seaborne exporter of hard coking coal in the world, so this could prove a very strategic relationship. In sharp contrast to CSX and Norfolk Southern (NYSE: NSC ) , both of which rely upon coal shipments for about 30% of revenue, Canadian National drew only 7% of operating revenue from coal last quarter.
As this week's results from Peabody Energy (NYSE: BTU ) made clear, exposure to domestic U.S. coal markets is generally a hindrance right now, but I view export-bound coking coal as a noteworthy exception. Meanwhile, Canadian National's freight mix consists of heavy exposure to some other markets that I consider less permanently impaired than many others, namely: metals, grains and fertilizer, and petroleum and chemicals (for export).
I still consider Canadian National Railway a well-positioned competitor within a fundamentally challenged industry … even if I don't think that industry's truly hit bottom yet.