2 Little Engines That Think They Can - And Ol' King Coal May Help

Includes: CSX, NSC
by: Jeff Binkley

On Thursday, January 10th, Goldman Sachs downgraded CSX Corporation (CSX) and Norfolk Southern (NSC) to "Neutral" from "Buy" with analysts stating:

We think the Eastern rails are likely to post the weakest YOY earnings growth in the transport space in 1H13 on soft export coal fundamentals and only modest traffic growth ex-coal.

Rail transport and CSX specifically has been the subject of a number of recent research reports. Analysts at Barclays Capital raised their price target on shares of CSX from $25.00 to $27.00 on January 7th. A few days before that on the 3rd, both Jefferies Group reiterated a buy rating on CSX with a $26.00 price target along with TheStreet reiterating their buy rating.

So much for clarity from analysts on rail prospects in 2013. What does appear clear are that both companies are pressing forward with expansion and development efforts… regardless of the 'softness' of coal.

Working with public and private development execs from 19 states, NSC has plans to open 64 new trading hubs as well as grow 30 existing industries in 2013. Along the way, close to 6,100 new jobs will be created within the railroad sector and growth of over 141,000 carloads of additional rail traffic each year is anticipated.

In 2012 CSX worked alongside its customers to locate 105 new or expanded facilities on its eastern rail network or on connecting short lines. These projects represent an investment by those customers of more than $3.2 billion and will ultimately create over 4,200 jobs among shippers in more than a dozen states:

These industrial facilities are expected to generate 162,000 carloads of new rail traffic in future years," said Clark Robertson, assistant vice president-regional development. "The 2012 results were especially significant in the energy markets, such as new ethanol and crude oil terminals, natural gas processing facilities and drilling supply locations. In addition, low natural gas pricing and abundant supply are prompting renewed manufacturing interest in the U.S. and specifically in markets served by CSX.

And now comes word from the US Energy Information Administration that U.S. coal exports may have actually set a new record in 2012.

U.S. 2012 coal exports, supported by rising steam coal exports, are expected to break their previous record level of almost 113 million tons, set in 1981. Exports for the first half of 2012 reached almost 67 million tons, surpassing most annual export volumes dating back to 1949. U.S. coal exports averaged 56 million tons per year in the decade preceding 2011. If exports continue at their current pace, the United States will export 133 million tons this year…

…This increase in exports marks a significant reversal from the general downward trajectory of U.S. coal exports beginning in the early 1990s, which bottomed out in 2002 just under 40 million tons, the lowest level since 1961. Coal exports in 2011 rose 171% from 2002, with only a brief interruption by the global recession. Export growth accelerated after the recession, with consecutive post-2009 growth of more than 20 million tons per year, a level of growth not seen since the 1979-to-1981 export boom. Current data for 2012 (through August) show coal exports are growing even faster and should more than double 2009 export levels, buoyed by growth in U.S. steam coal.

In a real twist of fate, where lower and lower natural gas prices here in the states are driving the use of coal, and its price, thru the floor, across the Atlantic and points farther East, natural gas prices have remained high making coal the economical, more affordable alternative.

Global demand for coal is expected to grow to 8.9 billion tons by 2016 from 7.9 billion tons this year, with the bulk of new demand - about 700 million tons - coming from China, according to a Peabody Energy study. China is expected to add 240 gigawatts, the equivalent of adding about 160 new coal-fired plants to the 620 operating now, within four years. During that period, India will add an additional 70 gigawatts through more than 46 plants.

"If you poke your head outside of the U.S., coal-fired plants are being built left and right," said William L. Burns, an energy analyst with Johnson Rice in New Orleans. "Coal is still the cheapest fuel source."

Sure, coal demand and usage is down here in the States. But with the exponential growth in power needs overseas and with coal "still the cheapest fuel source," you don't need to be a rocket scientist nor even a Goldman analyst to figure out the world still needs a lot of coal.

Where will much of that coal come from? From right here in the areas that have been producing coal for generations. And who will carry it to our shores for shipment overseas? The same companies that have been transporting it for generations as well.

With attractive current dividend yields of 2.7% and 3.1%, these two little engines could make for a pleasant ride while the economics of coal readjust to the continuing changes in global demand and supply.

Both CSX and NSC are expected to release earnings after market close on January 22nd.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. The contributing author, Binkley Wealth Management Group, LLC, and/or its clients may be pursuing the strategies and may or may not hold positions in securities mentioned in this article at the time of publication. The opinions and strategies expressed are not meant to taken as advice to any individual investor. The opinions and strategies discussed are not to be construed as personalized recommendations to buy, sell or hold securities by any individual investor without first consulting with their own personal financial advisor.