It can be seductively simple to see good news from one company and begin drawing conclusions about the industry.
Simple, but not always correct.
In the case of railroad company Union Pacific (NYSE: UNP), though, yesterday's good news should encourage investors who are bullish on the rails.
The largest railroad operator in North America, Union Pacific raised guidance for the first quarter from a range of $0.25-$0.35 per share up to $0.43-$0.48. Since at least one analyst estimated $0.50 before the announcement, some of the most wild-eyed optimists may be disappointed on the news, but the raised guidance still showed a solid improvement.
Keep in mind that Union Pacific's first quarter was expected to be something of a (pardon the pun) train wreck. A combination of factors, including storms along the West Coast, spurred analysts to look for a big drop from last year's first quarter. And indeed, even with this newly revised guidance, results will still be something on the order of 20% lower than those in last year's first quarter.
So what's the good news? The company continues to see strong demand for coal shipment, and the agricultural business is strong as well. Even though Union Pacific has managed to increase carload volume by only about 1%, strong pricing and fuel surcharges will boost total revenue growth to something on the order of 8% for the quarter.
It's that strong demand that makes me feel good about the industry as a whole. When railroads reported their December earnings, nearly all of them reported strong demand and firm pricing. Union Pacific's announcement, then, suggests that those factors haven't changed much in three months.
Better still, given that a lot of this growth is commodities-related (particularly coal and agricultural products) and not so much finished goods-related (like automobiles), that suggests that another leg up may be possible if or when growth picks up in the U.S. economy.
I'm not a huge fan of Union Pacific per se -- the company has relatively modest margins, a low return on equity, and some significant network issues -- but nevertheless, this stock is at a 52-week high.
Although I'd suggest first looking at railroads like Canadian National (NYSE: CNI) and Genesee & Wyoming (NYSE: GWR) before taking the plunge on Union Pacific, it's generally true that a rising tide lifts all boats -- or, in this case, rail cars -- and times appear to be good for those who ride the iron horses.
Become a modern-day Casey Jones with these other Foolish pieces on the railroad industry:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long, nor short the shares).
Terms & Conditions
RSS Headlines
Fool UK