North American freight trains may not levitate over the rails like the experimental MAGLEV trains that have clocked speeds of 361 mph. If they did, I might have to indulge in daily deliveries of fresh seafood from the Pike Place Fish Market in Seattle. Yum!
However, if second-quarter results from eastern railroad hauler CSX (NYSE: CSX) are any indication, even without levitation railroads may be experiencing little friction from what I perceive as resurgent weakness in the American economy.
The headlines will undoubtedly read like signposts of recovery. After all, since Alcoa (NYSE: AA) rang in the earnings season with an upside surprise, why spoil the party by noting the downward revision to those average estimates over the past 30 days?
Now, I don't wish to take anything away from CSX's impressive performance. CSX and its rival haulers have steamed through difficult business conditions with uninterrupted resilience and efficiency. Improving upon an already noteworthy operating ratio of 74.5% recorded in the first quarter, CSX notched a new record low of just 71.2% for the second quarter. Year-over-year, the hauler's revenue rose 22%, operating income increased 33% to $768 million, and earnings from continuing operations surged 51% to $1.07 per share.
The group has exhibited a sunified front of operating efficiency at every prior turn through this tumultuous economic landscape. Thus, I have no reason to suspect that forthcoming results from rival haulers will diverge from the tracks laid out by CSX. In fact, industry data reveals that CSX's strong volume improvements so far in 2010 actually lag behind those experienced by Union Pacific (NYSE: UNP), Norfolk Southern (NYSE: NSC), and my top pick: Canadian National Railway (NYSE: CNI).
To understand these improving freight volumes within their full and proper context, we need to dive into individual freight categories. CSX's automobile volumes surged 63% above last year's severely depressed levels, but I interpret much of that activity as a major inventory restocking phase, following the Cash for Clunkers sales blitz late last year. A bump in domestic auto manufacturing contributed to a nice boost in metals volumes, which jumped 44%.
All the same, my recent correspondence with straight-talking Nucor (NYSE: NUE) CEO Dan DiMicco corroborates my prior interpretation that surprising strength among steelmakers during the first half of the year provided no evidence at all of a sustainable recovery. As DiMicco points out, even massive stimulus expenditures failed to budge real unemployment between June 2009 and June 2010. He writes: "we spent over $1 trillion for a reduction of just 18,000 in the number of U-6 unemployed ... it is still stuck at 16.5% with 25.8 million people who want to work and cannot find full-time employment."
An oversupply of vessels has rendered the Baltic Dry Index a less effective macroeconomic indicator for the time being. Similarly, I submit that the migration of increasing transportation market share from the roads to the rails, especially in this elevated-oil-price environment, renders railroad haulage metrics a far less straightforward indicator of economic vitality than they might otherwise be.
With all of these factors in mind, I encourage Fools to resist the urge to hop aboard the alluring train of recovery hopes. Beneath the surface, I believe that a double dip continues to lurk.
