November 23, 2014

2010: A mighty fine year for railroads

So how did the major railroads perform in 2010?

The short answer is that one wouldn’t know they were operating in the midst of a recession.

Although calendar year profits have not yet been reported, railroad profits were up 33 percent for the 12 months ending in the third quarter, according to the U.S. Surface Transportation Board.

And investors’ expectations — reflected in railroad stock prices — is that calendar year 2010 earnings will be equally impressive; and 2011 earnings prospects are equally bright.

Wall Street analyst Ed Wolfe of Wolfe Trahan reports the level of freight car and intermodal loadings for the year registered “the best” year-over-year growth in more than 50 years. Wolfe and other Wall Street analysts – William Greene at Morgan Stanley, Thomas Wadewitz at J.P. Morgan, and Gary Chase at Barclays – are bullish on the industry’s earnings moving forward.

Analysts also point to the railroads’ pricing strength — the ability to raise rates on shippers with limited effective alternatives to railroad transportation. Many long-term contracts for hauling coal are expiring, and substantial rate increases on that traffic already are reflected in new contracts.

Another key element of railroad financial health is operating ratio — a railroad’s operating expenses expressed as a percentage of operating revenue (considered by economists to be the basic measure of carrier profitability.

Each of the major railroads — Canadian National, Canadian Pacific, CSX, Kansas City Southern, Norfolk Southern and Union Pacific — reported substantial improvements in operating ratio during the third quarter. (As BNSF is now privately held, it no longer reports detailed financial data.)

Stock prices are an excellent indicator of financial health and forward-looking prospects:

 Canadian National:

  • Per-share price is up 38 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $67.99 to $70.84 — a 4 percent increase.

 Canadian Pacific:

  • Per-share price is up 45 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $67.03 to $72.33 — an 8 percent increase.

 CSX:

  • Per-share price is up 62 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $68.03 to $71.92 — a 6 percent increase.

 Kansas City Southern:

  • Per-share price is up 74 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $51.46 to $55.29 — a 7 percent increase.

 Norfolk Southern:

  • Per-share price is up 41 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $65.32 to $70.71 — an 8 percent increase.

 Union Pacific:

  • Per-share price is up 60 percent over the 52-week low.
  • Analysts predict the per-share price to rise from the 2010 52-week high of $95.78 to $103.38 — an 8 percent increase.

 Major railroads — except for BNSF — will be reporting calendar year earnings over the next few weeks.