According to the weekly data for March 3, North American Rail Freight Carloads continued to see results slide. Total carloads declined 3.48% year over year to 373,530 units, mainly due to a 9.5% drop in trailers. However, Intermodal and Container traffic remain healthy with 6.4% and 8.9% year-over-year growth, respectively.
Commodity wise, rail freight for the week ended March 3 registered maximum declines in its coal volumes (15.2% year over year) due to continued substitution with lower-priced natural gas impacting utility coal volume.
On the other hand, Petroleum products remain strong, driven by a 22.5% year-over-year increase in carloads. The surging crude prices remain attractive for railroads, especially in regions like North Dakota that lack pipeline facility and rely more on rail freight services.
Rail freight carriers like Canadian Pacific Railway Ltd. (CP) have already begun to capitalize on these market opportunities by expanding rail freight services. The company will be the only rail freight to carry crude from the soon-to-begin oil terminal in North Dakota's Bakken shale oil fields, carrying 35,000 barrels of oil per day. The terminal construction is underway near Van Hook in North Dakota by the U.S. Development Group, a Texas-based developer of rail logistics and terminal facilities.
Going forward, the recovery in the growth in the North American auto industry continues to bode well for Metal products, driving growth of 18.5% year over year.
The current scenario of North American Rail Freight suggests a strong momentum in freight prices rather than any significant additions in freight volumes. Class I carriers like CSX Corporation (CSX), Union Pacific Corporation (UNP), Canadian National Railway (CNI) and Norfolk Southern Corporation (NSC) continue to enjoy pricing discretion with an average pricing growth of nearly 4%-5% per annum while maintaining double-digit profit margin.
However, the on-going economic volatilities in the U.S. and abroad may keep these railroads’ top-line growth under pressure in the near future. Moreover, the near-term growth for these companies will continue to be tempered by lower coal production, as forecasted by the U.S. Energy Information Administration.
Lower natural gas prices, coupled with a weak utility coal market have raised significant concerns. This is because utility coal makes up roughly a third of total coal shipments. Strong exports to Asian countries continue to remain a silver lining.
Currently we maintain a long-term Neutral recommendation on CSX Corp., Union Pacific, Canadian National, Canadian Pacific and Norfolk Southern. All these stocks carry a short-term (1-3 months) Hold rating (Zacks #3 Rank).
CDN NATL RY CO (CNI): Free Stock Analysis Report
CDN PAC RLWY (CP): Free Stock Analysis Report
CSX CORP (CSX): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
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