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XMFSinchiruna (27.09)

A Rough Spot Ahead for Railroad Stocks

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January 23, 2009 – Comments (5)

Hey Fools,

I've covered earnings results for three of the major rail carriers over the past few days, and rarely have I seen such a clear set of indicators impacting an entire group in such a regular way. Three different earnings releases, but they all said essentially the same thing to me... the railroad stocks are headed for a very rough patch for at least the next couple of quarters.

Bound for Glory, But This Train May Stop

Get a Better Deal Than Buffett

Less Gravy on the Train

All three companies indicated that 7-10% volume declines were offset largely by strong pricing and a lag between fuel prices and fuel surcharges. Both of those conditions will be gone by next quarter, and meanwhile the rate of freight volume decline has moved to over 20% in recent weeks. Some degree of earnings weakness has obviously been priced into these stocks already, but I think the degree of economic contraction in recent weeks will take every analyst by surprise. We'll see analysts revising their expectations and rail companies guiding lower over the coming months, and that could set the stage for Fools to find attractive entry points into strong players like CSX and BNI. Buffett was way early getting aboard the BNI train, IMO. His cash would have been better off parked in gold while he awaits an entry point substantially below present levels.

If you're in rail stocks, be prepared for a pit-stop. I believe longer-term the fundamentals do remain fairly positive once the massive stimulus plan kicks into gear. Until then, the sector might require some patience.

For those not in rail stocks, I recommend placing one or two of them on your watchlists. I'm not a bottom-caller, but anywhere beneath Buffett's recent entry price on BNI will likely pay off in the long run.

 

5 Comments – Post Your Own

#1) On January 23, 2009 at 6:51 PM, DemonDoug (32.21) wrote:

sinch, i think we've got way more to go down.  trains move around a lot of coal and steel and lumber and things like that, and those things are going way down.  I can see a potential 50% haircut from current share prices.  What will improve their margins is if fuel prices rise again they will gain more marketshare from trucks, however you have to realize that trains also run on deisel fuel (they just get more hauling milage per ton than trucks do).

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#2) On January 23, 2009 at 7:06 PM, Seano67 (25.08) wrote:

I bought into BNI way, way, way, way, WAY too early- back when it was at $84 in October. What a drag. :(

I love the company, I mean I think they're great. But I let that love blind me to the economic realities of the time, and man oh man do I wish I could hit the 'rewind' button and take that trade back. 

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#3) On January 23, 2009 at 8:01 PM, Imperial1964 (98.24) wrote:

I own NSC as a Buffet-style play.
I like your analysis and I was thinking of selling four months ago, but their 3Q report was too good for me to push the Sell button.

I need to look at it again, but I'm planning on holding.  Almost 4% divvy gives me a little peace of mind.  That, and I would be a little short on commodity-correlated stocks if I sold NSC.  If anything I am leaning toward increasing my exposure to commodity-correlated stocks.

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#4) On January 23, 2009 at 8:20 PM, catoismymotor (< 20) wrote:

I am in a similar boat as Seano67, but with CNI when I bought it in September. So I am trying to let the kneecapping it has received not get to me. I believe RR stocks are going to shake out very well if you plan on buying to hold for 15+ years.

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#5) On January 23, 2009 at 8:33 PM, RVAspeculator (29.54) wrote:

Sinchiruna,

Welcome back to positive territory my friend.  Long live the gold bull!

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