With all of today's talk about outlandish oil prices, it's no surprise that investors interested in transportation stocks would turn to railroads and away from the trucking industry. (Railroads are more energy-efficient than trucks.) Surprisingly, the biggest factor driving railroad growth right now is the resurgence of the oil-dependent automobile industry. According to Progressive Railroading, as of April 30, auto carloads were up 9.6% over the same time last year.

What's in a train?
Revenue from shipping cars can vary from railroad to railroad, but it usually makes up about 7% of the bottom line for the major players. It's an important enough revenue stream that railroad executives had daily conversations with automobile companies during the 2008 season of bankruptcies and bailouts. In first-quarter earnings calls, some executives went as far as citing the automotive turnaround as a reason for increasing revenue. Automotive revenue grew 43% in the first quarter at Kansas City Southern (NYSE: KSU), leading all segments.

Who profits and how?
Another railroad that will benefit from the uptick in auto sales is CSX (NYSE: CSX), the Jacksonville, Fla.,-based rail company that operates 21,000 route miles in 23 states, the District of Columbia, and parts of Canada. CSX derives about 8% of its annual revenue from handling automobiles, touching close to one out of every three autos produced in the United States.

Historically, CSX has benefited mostly from the big three Detroit automakers: General Motors, Ford, and Chrysler. The company has diversified and now stands to gain from companies such as Volkswagen, which just opened a new $1 billion dollar plant in Chattanooga, Tenn. CSX is one of only two railroads involved in shipping cars from the plant.

Norfolk Southern (NYSE: NSC) is also aboard the Volkswagen train. VW built its Chattanooga plant with the intention of shipping 85% of the automobiles it produced by rail, and Norfolk Southern will be a big part of that plan. It operates 21,000 route miles and the largest intermodal network in the eastern United States.

Union Pacific Railroad (NYSE: UNP) watched its automobile loads shrink 50% in 2009. That ghastly number led the company to institute a series of changes, including developing a special adjustable automotive railcar that can hold various sizes of vehicles. The shake-up worked, and auto traffic climbed 37% in 2010. Side note: In a stroke of genius, Union Pacific is marketing the train car to other railroad companies. Three cheers for additional revenue streams!

Bottom line
The recent resurgence of automobile companies is great news for the railroad stocks. If cars sell well in the United States, railroads will continue to reap the benefits. The percentage of revenue derived from automotive shipping is small, but it serves as a reminder to investors that even small revenue streams can make a difference.

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