The Chattanooga Choo-Choo Woo-Hoo!

The sobs of woe that could be heard on the nation's railroads last year have abruptly given way to shrieks of delight.

Norfolk Southern (NYSE: NSC  ) has given last year's theme song, the "Chattanooga Choo-Choo Boo-Hoo," a welcome rewrite to reflect the strong revival of freight demand that major operators have reported for the first quarter of 2010. For delighted railroad investors, it's enough to make you shout, "woo-hoo!"

The hauler generated a 45% surge in net income, earning $257 million on just a 15% revenue boost to $2.2 billion. Total freight traffic rose 9% over the prior-year mark. Promoting the tempting supposition that American consumers may be opening their purse strings, revenues from general merchandise improved 23% over comparable 2009 levels. Revenue from intermodal freight -- another consumer-sensitive category -- rose 12%. Industry data suggest the second quarter may look stronger still, with the operator's overall carloadings up some 24% thus far.

Thanks to a surprisingly strong 57% surge in domestic freight demand for metallurgical coal, Norfolk Southern's coal revenues increased 4%, helping to offset the pronounced lag in steam coal demand from eastern utilities that miners like Arch Coal (NYSE: ACI  ) have documented. Given the significant uptick in export activity by Appalachian miners that I have been tracking, it will come as no surprise to Fools that Norfolk's export-bound coal and iron ore volumes soared 37% to 6 million tons, outperforming even the precollapse comparable volumes from 2008.

A cautionary tune
Union Pacific (NYSE: UNP  ) sang a similar tune this week, proclaiming, "what a difference a year makes." Norfolk's western rival notched a 43% increase in net earnings on the strength of a 25% surge in intermodal revenue and improving industrial activity across multiple segments. CSX (NYSE: CSX  ) and Canadian National Railway (NYSE: CNI  ) both chugged into earnings station with corroborating tales of welcome freight volume improvement, albeit with smaller increases in earnings of 22% and 25%, respectively.

The easy temptation when positive indicators reemerge from multiple sectors following a calamitous economic collapse is to sing a victory song for sustainable recovery. As we learned from George W. Bush on that fateful flight deck, however, premature declarations of victory can prove more costly than patience and prudence. Union Pacific CEO Jim Young said it best: "I don't think anybody knows how much of this is inventory replacement versus sustainable demand." I voiced similar words of caution after noting surprising strength from steelmakers AK Steel (NYSE: AKS  ) and Steel Dynamics (Nasdaq: STLD  ) last week, and I remind Fools to maintain guarded vigilance while enjoying this long-awaited chorus of measurable progress.

Nearly 1,000 Motley Fool CAPS members, including 326 All-Stars, expect five-star pick NSC to outperform the S&P 500. In all, the CAPS community has shared its collective insight on 34 "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. Chris owns shares of Arch Coal. Canadian National Railway is a Motley Fool Stock Advisor pick. 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 May 04, 2010, at 9:54 AM, golfamatic wrote:

    CAPS rates CNI 5 stars; Morningstar rates CNI 2 stars. What gives? I've been buying CNI every month for 5 years now. Very pleased.

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