Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

CSX Corporation (CSX), Union Pacific Corporation (UNP), Norfolk Southern Corp. (NSC): Can U.S. Railroads Prosper in Spite of Coal?

Many of the U.S.-based publicly traded railroads are suffering from extremely tough operating conditions, and there’s only one culprit: coal. Due to a variety of factors including depressed natural gas prices and a broader national desire for cleaner sources of energy, railroads are shipping significantly reduced levels of coal and realizing lower prices to boot. This has brought down bottom lines across the industry, and it makes investing in railroads an iffy proposition.

CSX Corporation (CSX)

Are any domestic railroads that are worth buying despite coal’s drag on profitability, or would investors be better served remaining on the sidelines until coal fundamentals improve?

Coal in the cross-hairs
The recent results from a slew of large railroads such as Norfolk Southern Corp. (NYSE:NSC), and CSX Corporation (NYSE:CSX) reveal that coal is sandbagging their profits.

Norfolk Southern Corp. (NYSE:NSC) relies on coal for approximately 22% of its operating revenue, and the company’s sluggish results exemplify the dour situation facing coal.

Coal revenues dropped 17% in both the most recent quarter and the first six months of the year for Norfolk Southern Corp. (NYSE:NSC), offsetting strength in the company’s General Merchandise and Intermodal segments. Overall, Norfolk Southern Corp. (NYSE:NSC)’s quarterly revenue fell 3% year over year, despite coal being the only operating segment to see a decline in revenue during the quarter.

For its part, CSX Corporation (NYSE:CSX) is holding steady. The company’s second-quarter revenues were flat year-over-year, while diluted earnings per share managed a 6% increase.

Coal is very important for CSX Corporation (NYSE:CSX) as well, however, as it accounts for one quarter of the company’s revenue. Over the first six months, CSX Corporation (NYSE:CSX) has seen its coal volume and revenue drop 8% and 9%, respectively.

Going forward, CSX Corporation (NYSE:CSX) is not overly optimistic about coal as it has noted the pronounced global oversupply as a likely headwind in future quarters. As a result, CSX Corporation (NYSE:CSX) investors should monitor the company’s coal results closely.

A clear outperformer
Union Pacific Corporation (NYSE:UNP), meanwhile, is not only hanging on through this tough environment — it’s thriving. The company’s fiscal second quarter produced record diluted earnings per share, operating revenue, and operating income. In all, operating revenue and diluted EPS climbed 5% and 13%, respectively.

Most surprisingly, though, Union Pacific Corporation (NYSE:UNP) grew freight revenue in four of its six segments. This included coal, which saw a freight revenue increase 12% in the second quarter. Second-quarter volumes actually fell 1%, which means that Union Pacific Corporation (NYSE:UNP) boasts exemplary pricing power.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.