Monday, September 9, 2013

Railroad Traffic Heats Up, Expect Big Third Quarter

The North American economy is picking up speed. Traffic on railroads in Canada, Mexico and the United States increased 1.4% year-to-date through Aug. 31. U.S. GDP grew 2.5% in the second quarter. Railroad traffic numbers in August indicate third-quarter economic activity may be accelerating.

U.S. intermodal traffic in August 2013 totaled 1,031,179 containers and trailers, up 4.4 percent (43,398 units) compared with August 2012, The Association of American Railroads reported on Sept. 5. The weekly average of 257,795 units in August 2013 was the highest weekly average for any month in history, AAR said.

“In terms of average weekly volumes, August was the best intermodal month in history for both U.S. and Canadian railroads,” said AAR Senior Vice President John T. Gray.  “Because the fall is typically the peak season for intermodal traffic, it wouldn’t be surprising to see new records set in September and October.”

Intermodal traffic is the movement of truck trailers or containers by rail and at least one other mode of transportation, usually trucks. An increase in intermodal traffic means retailers are gearing up for a big fall and Christmas.

Stocks benefiting from these trends are Union Pacific Corp. (NYSE: UNP), Kansas City Southern (NYSE: KSU), Canadian National Railway (NYSE: CNI), Canadian Pacific Railway (NYSE: CP) and Berkshire Hathaway’s Burlington Northern Santa Fe (NYSE: BRK-B).

The bottom in domestic coal shipments may have occurred in spring or summer. North American coal traffic was down 3.7% year-to-date through Aug. 31, but was up 1.8% week ended Aug. 31. 

CSX (NYSE: CSX), based in Jacksonville, Fl, is seeing coal shipments stabilize after falling for the past couple years.  Domestic coal shipments increased in second quarter for CSX -- a trend that will likely continue through the rest of the year.

Hot weather in August and early September contributed to an increase in shipments of coal to power plants that generate electricity for air-conditioning.

U.S. shipment of petroleum and petroleum products grew 40.5% year-to-date through Aug. 31 compared with same time in 2012. 

In Canada, shipment of petroleum and petroleum products was actually down 4.1% week ended Aug. 31 but was up 16% yeear-to-date through Aug. 31. 

Mexican Economy Heats Up

Mexican Rail Traffic is on fire, up 5.6% year-to-date through Aug. 31 and up 7.9% in week ended Aug. 31. Much of Mexico’s growth is from shipment of grain and auto products. Shipment of motor vehicles and parts were up 31.2% year-to-date. Shipment of grain in Mexico was up 63.8% year-to-date. The company benefiting most from these traffic patterns is Kansas CIty Southern, which moves autos and grain in and out of Mexico. Kansas City Southern is the premier North-South rail line in North America using components of the NAFTA Railway system, linking the commercial and industrial centers of the U.S., Mexico and Canada.

Kansas City Southern owns a direct route between Mexico City and Laredo, Texas, and 50% interest in the Panama Canal Railway Co.

Kansas City Southern's second-quarter 2013 revenues grew 6%. Operating income was $179 million, 12% higher than adjusted operating income in second quarter 2012.

Based on growing trade in North America, Kansas City Southern will likely post record revenues in third-quarter 2013.

Grain shipments in the United States and Canada were down 15.3% and 3.1% respectively year-to-date, due to the 2012 drought, but I expect these numbers to improve after the grain harvest this fall.

The Dow Jones U.S.Railroads Index was up 24.1% year-to-date through Sept. 8.

The Bottom Line

August railroad traffic numbers indicate third quarter revenues for Class 1 Railroads will be higher than a year ago. Intermodal traffic in the U.S. and Canada hit records in August and will likely set more records in September and October, typically the heaviest shipment months for retailers preparing for fall and year-end sales. Domestic coal shipments -- after several years of declining numbers -- may be on the rebound after an uptick in demand. Kansas City Southern is benefiting from robust trade between the United States and Mexico. Railroad stocks have already run up 24.1% this year, yet it is possible for these stocks to climb higher if the economy heats up in the second half of 2013 and early 2014.

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