In an interview with CNBC a few years ago, legendary investor Warren Buffett was asked what set of numbers he would choose if he could only look at a single economic indicator for a month. While the Oracle of Omaha was hesitant to pick just one, he went with rail car loadings as his "desert island" indicator. You might say Buffett's a little biased, considering he bought up North America's second-largest railroad himself, but it makes sense. Railroads are the circulatory system of the economy, moving raw goods to factories and finished products to consumers. So it should be good news to more than rail investors to hear great results this quarter from some of North America's biggest railroads, including Canadian National Railway (USA) (NYSE:CNI), Norfolk Southern Corp. (NYSE:NSC), and Canadian Pacific Railway Limited (USA) (NYSE:CP) this week, following on the heels of CSX Corporation (NYSE:CSX) and Union Pacific Corporation (NYSE:UNP) last week.
Photo courtesy of Canadian National
North America's Class I rail stocks have been in a transition period in recent years, asrailroads have struggled with big declines in coal. Coal has historically been the largest volume driver and the most important commodity for railroads, but coal production has fallensteadily as natural gas has replaced it as the primary feedstock for power plants thanks to its cheap, abundant supply made possible by the shale fracking boom in North America.
That trend has caused analysts to expect hard times for the railroads, but in the third quarter every major railroad that has reported so far handily beat earning estimates. Sources of strength for the railroads were widespread and varied, with railroads reporting strong growth in intermodal cargo, automobiles, industrial materials and consumer goods, all signs of a broadly growing economic base. Railroads also benefited from dramatically increased shipments of crude oil, chemicals, and fracking sand made possible by the same shale energy boom that's hurt coal volumes.
The party kicked off with the East Coast's largest railroad, when CSX announced an earnings beat thanks largely to intermodal carloads and fracking-related shipments more than making up for declining coal. Union Pacific kept the good news coming, with significant increases in cars and industrial goods like cement, steel, and finished machines.
Norfolk Southern is the second-largest railroad on the East Coast, meaning that it, like CSX, has historically been highly geared to Appalachian coal shipments. Norfolk overcame its own coal deficit primarily with nearly 7% growth in intermodal shipments, 9% growth in metals and construction materials, and 14% growth in chemicals, again driven by shipments of crude oil from new shale production fields to East Coast refineries. Despite a 2% decline in coal, total unit volumes grew by 4%. Total earnings for the third quarter grew 20% on the back of these results.