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
Who profits and how?
Another railroad that will benefit from the uptick in auto sales is CSX
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.
Union Pacific Railroad
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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