Will Railway Prices Stay On Track?

Railway companies may have been able to maintain healthy pricing growth in 2007 and 2008, but next year could be an entirely different story as loads could see big declines. So investors are playing close attention to whether or not management can push rates higher in spite of the weakening economic outlook.

If they believe that the rails will “just because they can” as they capitalize on factors like regional duopolies, natural monopolies and newfound pricing discipline, then investors should be buyers, analysts at UBS suggest.

They noted that U.S. volumes fell 5.4% last week, with every commodity group lower, except for coal, which rose 3.4%. The biggest declines was 23% for autos, while metals fell 16% and chemicals dipped 12%. Canadian carloads were worse, falling 9.3%. Coal rose 10% and paper was flat, while autos declined 33%, chemicals 13% and metals 12%.

Railroads pricing growth has been able to withstand volume weakness since late in 2006, which was concentrated in the autos and forest segments. A recent UBS survey and its discussions with customers and managers suggests pricing growth remains robust and at least consistent with cost inflation of 3% to 5%, excluding fuel.

It expects earnings per share (EPS) growth will continue to be supported by this pricing growth as well as productivity gains and share buybacks.

And while EPS growth is expected to moderate from 22% in 2008 to 12% in 2009 on weaker volumes, UBS said the sector remains attractive at 12 times price-to-earnings on 2009 estimates. It rates all six Class 1 rails a “buy,” while Union Pacific Corp. (UNP) and Canadian Pacific Railway Ltd. (CP) are its top picks.

Comments

[Urbane Gori...:]

I couldn't understand why the rails were doing so well moving coal and ag chemicals if the Dry Bulk Index is down 90% of what it was a year ago and ships are parked at docks, It makes no sense. Either we're consuming these products within the US, or they're piling up on the docks. I'm guessing our view of the rails is based on last quarter's earnings, whereas the DBI is very present on a daily basis. I sold my BNI on a jump and would look at rails real hard before buying again.

jegan ;-)

2008 Nov 09 04:43 PM