After shouting from the rooftops to steer Fools well clear of a railroad industry in fundamental freefall, I can finally report that the tracks have leveled out. Whether this is the bottom that CSX (NYSE: CSX ) boldly declared last week, I'm not so sure, but let's take stock of where we are today.
Burlington Northern Santa Fe (NYSE: BNI ) and Union Pacific (NYSE: UNP ) both reported second-quarter results last week, and both companies managed to soundly beat analysts' earnings estimates while missing to the downside on revenue. The secret, of course, was a singular focus on cost-cutting initiatives, as well as a sharp reduction in fuel costs from the prior year. In Union Pacific's case, fuel costs fell 69% to just $370 million.
The ability of these railroads to remain solidly profitable in the face of these incredibly difficult business conditions is truly an amazing achievement.
I've been steadfast in sounding alarm bells about fundamental weakness in the various industries that drive rail freight traffic, but it seems I underestimated the railroads' capacity for shredding costs as revenue declined mercilessly. Burlington Northern Santa Fe delighted vested Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) investors and its own shareholders with earnings of $404 million, even as revenue dropped 26% to $3.3 billion. Union Pacific revenue fell 28% as freight volumes dropped 22%.
I still believe that a long, hard path awaits these operators, but their effective response to the crisis has mitigated a portion of my concern. Still, I just can't shake the feeling that shares have gotten ahead of themselves.
I find Canadian National Railway (NYSE: CNI ) the most enticing member of the group, especially after a new arrangement with Teck Resources (NYSE: TCK ) to haul some western Canadian coking coal to port. All the same, substantially more attractive entry prices could be in the making if an L-shaped recovery outlook sets into the broader markets.
Consider the outlook of the haulers themselves. Union Pacific CEO Jim Young declared: "We've got a long ways to go before you can declare the recession's over." Burlington Northern CEO Matt Rose noted: "We normally see a lot of improvement in the third quarter -- we're just not seeing that. But we are seeing stability in the volumes."
Any recovery will crawl at the speed of an Appalachian coal train, so I simply see no rush to hop aboard.
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