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When it comes to proving their mettle, from under the weight of a brutally stagnant economy, the North American railroads have done some heavy lifting.
CSX (NYSE: CSX ) set the bar high with a tough act to follow, but follow it they have. Union Pacific (NYSE: UNP ) last week converted a 21% revenue bump into a burly 54% surge in earnings-per-share. This week, Canadian National Railway (NYSE: CNI ) and Norfolk Southern (NYSE: NSC ) proved once again that these major railroads move together as a tightly-bound pack of closely matched rivals.
Canadian National Railway's third-quarter earnings boost of 21% (to C$556 million) may appear a tame counterpart to Norfolk Southern's 47% increase (to $445 million), but the more northerly operator continues to dominate the industry with respect to profit margin.
Among railroads, that profitability is measured in terms of operating ratio, which is the inverse of operating margin. While the railroad pack as a whole has streamlined effectively to haul operating ratios to beneath 70% (meaning operating margins of just over 30%), Canadian National Railway managed a 60.7% ratio to maintain its profitability advantage. That peer-leading margin performance has factored into my longstanding preference for Canadian National Railway as the smoothest ride on rails.
A fine-toothed comb is often required to discern the relative strengths and weaknesses among these quality haulers. They have each, for example, enjoyed plentiful revenue increases from double-digit improvements in intermodal freight volumes throughout North America. The coal market is where I begin to see regional differentiators creeping into the picture.
CSX grew coal volumes by only 3% in the third quarter, reflecting the continued (albeit reduced) overhang of surplus stockpiles at domestic utilities. Thanks in part to a short-lived surge in domestic steel production, Norfolk Southern realized a 15% increase in overall coal volume on the strength of a 70% increase in domestic met coal haulage. Canadian National, for its part, carried-in a 16% coal-volume increase. It is worth noting, however, that Teck Resources (NYSE: TCK ) recently signed a 10-year agreement with Canadian Pacific (NYSE: CP ) covering haulage of coals from the company's mines in British Columbia. Meanwhile, Canadian National just completed "a new end-to-end supply chain focus on Western Canada export coal traffic," which suggests that export-bound coal will remain an important source of revenue.
As a group, the railroad operators form an attractive pack of long-term investment opportunities, where the ability to withstand frightful business conditions has already been well established. Correctly identifying the relative outperformer of the group may well remain a challenge, but I continue to give a slight Foolish edge to Canadian National Railway.
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