Wild Horses Drag the Freight Away

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As I mentioned last quarter when this railroad operator was singing a joyful tune, the writing was already on the wall for solid second-quarter performance to follow.

With all the captive energy of the horses in the company logo, Norfolk Southern (NYSE: NSC  ) dragged 22% more freight across its tracks than it had in the prior-year period. The resulting 31% boost to operating revenue is accompanied by an even more impressive 58% surge in earnings per share to $1.04.

Norfolk Southern managed to absorb higher fuel and labor costs while still achieving substantial improvement to its operating ratio. From a prior-year mark of 74.8%, the hauler trampled the ratio down to 69.8%. This is on par with western counterpart Union Pacific's (NYSE: UNP  ) latest reading, although Canadian National Railway (NYSE: CNI  ) remains the leanest of the pack with a corresponding ratio of 61.2%.

When the railroad industry reached consensus a year ago that freight demand had carved a resounding bottom, CEO Wick Moorman added that "significant recovery could still be a year away." Today, after four consecutive quarters of volume growth, Mr. Moorman remains "optimistic about continued year-over-year increases in rail traffic." Given the unnerving signals of weakness emanating from many of the relevant industrial bellwethers lately, we'll have to see whether these volume increases are indeed sustainable over time.

Volumes hauled rose across all freight categories, although Norfolk Southern's 19% increase in automotive volumes came nowhere near rival CSX's (NYSE: CSX  ) 63% jump. Coal volumes rose 19% as well, but it's important to note that volumes shipped to domestic utilities decreased 4% from already extremely depressed levels. The bulk of the improvement in coal, rather, came from a 177% surge in export volume and a 125% leap for metallurgical coal.

As difficult as operating conditions have been for Appalachian coal miners Massey Energy (NYSE: MEE  ) and Patriot Coal (NYSE: PCX  ) , they and other key producers have nonetheless increased shown a strong trend toward increasing export volumes hauled over the rails of CSX and Norfolk Southern.

Norfolk Southern offers a similarly valuable breakdown of intermodal traffic that assists Fools in their efforts to interpret implications of data for the broader economic landscape. Since "truckload diversions" -- or the switching of traffic from the roads to rails -- contributed to a 32% increase in domestic intermodal traffic, the company's 20% increase in total intermodal volume is not as directly translatable to increases in international movements of consumer goods as people might be tempted to presume.

Despite my own trepidations about the potential for an interruption of improvements in the domestic economy, I find these lean, highly adaptable railroads a resilient group of companies that are likely to profit through a range of economic scenarios. Canadian National remains my pick of the litter, but truly they are each solid candidates for investment capital.

Nearly 1,000 Motley Fool CAPS members, including 331 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. 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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