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Recovery Gets Harder to Haul

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If this is what recovery looks like, then we might just need a new word.

Railroad operators began adding the word "recovery" to their cargo loads after the second quarter indicated some stabilization of demand. After year-over-year railroad freight volume declined more than 20% during the second quarter -- with CSX (NYSE: CSX  ) and Union Pacific (NYSE: UNP  ) each reporting 22% declines -- sequential improvement was quickly heralded as a welcome bottom for the sector.

Third-quarter results released this week by CSX, meanwhile, highlight the stark reality of a recovery that is rather weighty in its ability to keep domestic railroads from gaining much momentum. CSX reported earnings of $293 million for the period, besting expectations despite a disappointing 23% slide in revenue to $2.3 billion.

Delving into CSX's 15% decline in total volume of cargoes hauled, we find bellwether coal volumes declining a discouraging 18%. The company noted that coal inventories at domestic utilities have reached record levels, representing more than twice the rate of present consumption, and prompting CEO Michael Ward to concede: "Our coal business will be affected by weak demand well into 2010."

Fools will recall that coal represents about 30% of total volumes hauled for both CSX and Norfolk Southern (NYSE: NSC  ) , so the outlook for coal is a key indicator for these operators in particular. Investors with exposure to domestic coal producers like Massey Energy (NYSE: MEE  ) and Arch Coal (NYSE: ACI  ) are strongly encouraged to track these railroad haulage metrics on an ongoing basis.

Looking to the automotive segment, where the Cash for Clunkers program provided a short-lived boost, freight volume nonetheless declined from prior-year levels at an alarming 28% clip during the third quarter. Industrywide, automotive volumes are recording some of the best levels of the year -- down only 16% on a four-week rolling average -- as dealers are restocking inventories.

From here forward, however, we run into a perception trap where year-over-year comparisons harken back to already impaired levels from late 2008. For more meaningful context, we compare haulage figures with corresponding 2007 levels, and find that automotive volumes remain 37% below precollapse levels.

This Fool is continually impressed by the railroad industry's effective adaptations to an unprecedented plunge in demand. My cautionary approach to the sector is not intended to detract in any way from noteworthy achievements in cost reductions and overall efficiency. I continue to nominate Canadian National Railway (NYSE: CNI  ) as best in class, but remain duly mindful of the massive challenges that this recovery must carry.

The Motley Fool 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 industry will fare.

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 in the CAPS community under the user name TMFSinchiruna. He also tweets. He owns shares of Arch Coal. Canadian National Railway is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy never plays on the tracks.


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10/25/2016 4:00 PM
CSX $30.85 Up +0.44 +1.45%
CSX CAPS Rating: ****
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