These Railroads Don't Lie

In a world where economists get it wrong, politicians don't get it, and the financial media just wants to cheer you up, it's comforting to know that key bellwether companies provide an objective snapshot of economic reality without a lick of spin.

Eastern U.S. railroad operator CSX (NYSE: CSX  ) arrived at the earnings station this week, offloading another impressively profitable quarter in the face of unrelenting weakness in volumes shipped. Adjusting for the loss associated with last year's sale of the Greenbrier resort, earnings from continuing operations fell just 16% from the prior-year period. For the full year, CSX hauled in $1.15 billion in profit, while absorbing a 20% hit to the top line.

Meanwhile, the alarm bells from this bellwether sector continue to ring. CSX reported a 7% drop in overall freight volumes for the fourth quarter. While that may sound like a marked improvement compared to the full-year decline of 15%, Fools are reminded that the fourth quarter marked the first period for which year-over-year comparisons relate to the deeply impaired conditions that existed by late 2008. Understanding this perception trap is critical to the proper interpretation of comparative data.

Only three out of 10 freight categories recorded gains. Automobile volumes rose 3% thanks to the Cash for Clunkers initiative, which depleted inventories and relieved considerable strain from manufacturers like Ford (NYSE: F  ) . One might be inclined to welcome the 78% surge in industrywide automobile volumes thus far in 2010 as a signal of robust recovery. However, adjusting for the perception trap by looking two years back for comparison, we can see that the industry remains 41.5% behind comparable 2008 volumes.

More troubling still is the mind-boggling degree of weakness in domestic demand for coal. Mining equipment manufacturer Joy Global (Nasdaq: JOYG  ) suggested last spring that thermal coal demand should roughly correspond with percentage changes in an economy's GDP. Clearly, the ongoing drought in coal demand has veered dramatically from that conventional wisdom, as CSX's total coal volumes plummeted 23% during the fourth quarter.

The decline marks a sequential erosion from even the third quarter's 18% decline, and calls into question the bottom declarations issued last summer by miners like Arch Coal (NYSE: ACI  ) . Citigroup chopped its ratings on Arch Coal and Appalachian producers like Massey Energy (NYSE: MEE  ) and Patriot Coal (NYSE: PCX  ) this week. After eyeing the data from CSX, this Fool can hardly disagree.

As I continue to await confirmation of the much-touted domestic economic recovery from the relevant bellwether companies, these results from CSX suggest not only a difficult journey ahead for domestic railroads -- including Warren Buffett's beloved Burlington Northern Santa Fe (NYSE: BNI  ) -- but also a growing risk of a double dip in the optimistic equity markets.

More than 1,600 Motley Fool CAPS members, including 392 All-Stars, expect four-star pick CSX 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 these persistent economic headwinds.

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 also tweets. He owns shares of Arch Coal. Ford 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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  • Report this Comment On January 22, 2010, at 1:19 PM, BobMichigan wrote:

    I think that investors spend too little time looking at some of the great indicators out there that are not spun out of someone's agenda or subject to statistical spin, like freight volume.

    In 1991, while Bill Cinton was telling George Bush I that "it's the economy stupid", I was working for a heavy truck parts manufacturer that was working flat out 3 shifts. Everyone knew the recession was over 6 months before NBC, and all the company executives had bought Navistar stock.

    The real bellweathers for a recovery will be in things like freight volume, steel tonage, heavy truck sales, not housing starts which can be artificially skewed with mortgage deals.

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