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What You Need to Watch as Railroads Report Earnings

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The railroad industry has been in the doldrums over the past month, with most of North America's big Class I carriers trailing the S&P 500 by anywhere from 3 to 10 percentage points. The trouble started when Norfolk Southern (NYSE: NSC  ) lowered its earnings guidance in September, blaming low coal volumes and triggering a sell-off across the industry. Now, investors will get their first glimpse into whether the market overreacted as several major railroads will be reporting earnings in the week ending Oct. 20.

CSX (NYSE: CSX  ) will be the first up, releasing third-quarter results on Tuesday and hosting a conference call with analysts on Wednesday. CSX's data will be particularly interesting because in many ways the company looks a lot like Norfolk Southern. Both span the entire Eastern seaboard, with most or all of their trackage east of the Mississippi. As they are by far the largest two railroads serving the dense Eastern United States, they both have strong exposure to intermodal traffic, often taking consumer goods from ports to cities. Finally, they share the dubious honor of being the only two public Class I railroads that derive more than 30% of revenue from coal shipments.

With such striking similarities, CSX is expected to deliver results somewhat in line with Norfolk Southern's more austere outlook. However, strong results could indicate either that Norfolk Southern was too pessimistic, or even that Norfolk Southern's problems have been operational, not indicative of a tougher business climate in general.

There is some reason to think that terminally declining coal volumes should not be the only factor affecting railroads. One bright spot should be intermodel cargo, a classification that includes many retail and consumer goods. Railroads are the cheapest method of transporting many goods because of the inherent fuel efficiency of steel-wheel-on-steel-rail technology, as well as the relatively low labor costs involved. FedEx (NYSE: FDX  ) highlighted this important fact recently when it lowered its own revenue projections. FedEx, which operates its own fleet of freight airplanes and delivery vehicles, complained that its own sales were being hurt because customers were downgrading services, choosing modes such as maritime and railroad transportation that were slower but less expensive.

Some confirmation that intermodal volumes might be improving for railroads will come on Thursday the 18th, when Union Pacific (NYSE: UNP  ) releases earnings. Union Pacific's geography gives it access to bustling Western ports and Chinese trade, and as a result, the company gets more than 20% of revenue from intermodal traffic, slightly ahead of Norfolk Southern and one of the highest ratios in the industry.

Kansas City Southern (NYSE: KSU  ) , the smallest Class I railroad and one of the most diversified in terms of revenue, will also be reporting earnings on Thursday. Kansas City Southern should be helped by higher prices for grain and agricultural products, which account for 17% of the company's revenue.

With the pounding that railroad stocks have taken lately, a good earnings result from any of these companies could send share prices soaring. One railroad stock in particular has the geography, the revenue mix, and the operational record to survive short-term challenges and reward shareholders for years to come. To learn more about this best-in-class operator for free, click to discover one railroad stock poised to deliver.

Fool contributor Daniel Ferry has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/21/2016 4:00 PM
CSX $30.29 Down -0.05 -0.16%
CSX CAPS Rating: *****
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