Class I Rail Traffic Performance Ends 2016 On A Strong Note

| About: Industrial Select (XLI)

Summary

For the month of December, rail traffic accelerated into positive territory versus last year.

Total traffic through December 2016 finished the year down five percent, with carload traffic down around seven percent and intermodal traffic down two percent.

Intermodal container traffic was flat for the year; seaport traffic has witnessed strong improvement of late.

All Class Is displayed positive total traffic during December, the first time this has occurred during the year.

Source: Class I websites and personal database, carload and intermodal units carried

Class I total traffic was positive for December for only the third time during 2016. Performance was at 5.9 percent versus last year. This compared to last month's 1.3 percent performance, reflecting a 460 basis point (bps) improvement.

The key measure to keep an eye on as always, continues to be the weekly 800,000 rail traffic level, which has been breached now 13 out of the previous 16 weeks. The previous two-week results below the 800,000 level are typical for the start of the winter season. It should be noted that all carload and intermodal unit traffic is reflective of carried railcars. Carried railcars are a combination of carloads and/or intermodal units originated and received.

Source: Class I websites and personal database, carload and intermodal units carried

For the year, total Class I rail traffic carried has continued to improve since the lows set in March and April. Norfolk Southern (NYSE:NSC) was the strongest performer with total rail traffic up nine percent versus last year. This was led by intermodal units carried increasing by nearly 17 percent. Other performances were as follows; BNSF (NYSE:BRK.B) 7.5 percent, Canadian National (NYSE:CNI) 7.3 percent, Kansas City Southern (NYSE:KSU) five percent, CSX (NYSE:CSX) 3.6 percent, Union Pacific (NYSE:UNP) 3.4 percent and Canadian Pacific (NYSE:CP) 3.3 percent.

Source: Class I websites and personal database, intermodal units carried

For Class I container traffic YOY, December performance improved by 11 percent, an 830 bps increase from November's 2.7 percent. Investors should note that intermodal includes both international and domestic services. International and domestic have been mixed from soft seaport demand throughout 2016, but the peak shipping season has driven performance much higher the past few months.

Source: Class I websites and personal database, intermodal units carried

The monthly performance during December was the third consecutive month since February that results were positive. It was also only the second time for double-digit performance during the year. Trailer traffic improved by 10 percent YOY during December, the first positive performance for the year. The havoc wreaked by the Triple Crown service restructuring has continued to weigh on all Class Is; next year should see a return to positive growth.

Source: Class I websites and personal database, container units carried

The 11 percent improvement during December was broad-based as all Class Is witnessed improved performance versus November. Union Pacific and Kansas City Southern continued to be the laggards despite improved performance.

Source: Class I websites and personal database, carloads carried

U.S. and Canada Class I carload traffic witnessed a 140 bps increase from November during December with a YOY increase at two percent. This marks the second consecutive time that carload traffic has been positive for 2016. It also reflects the eighth time this year that YOY performance has been better than double-digit declines and is the seventh consecutive week. The trend to positive territory has clearly been achieved.

Source: Class I websites and personal database, carloads carried

Class I carload traffic performance during 2016 has been abysmal. Since August, performance has dramatically improved from greater than -6 percent to December's two percent results. This trend should continue into 2017 as the baseline comparable will be low through next summer. This should be achievable especially if GDP growth remains between two and three percent, leading traffic to remain positive through most if not all of 2017. Early expectations should be conservative though for marginal growth.

Source: Class I websites and personal database, carloads carried

For Class I carload top five commodities, coal continued to sustain improvement as December performance improved by two percent YOY, versus the five percent decline during November. All Class Is witnessed improved performance during December.

Chemicals performance improved five percent during December YOY, versus the 2.5 percent increase during November. Results among Class Is were mixed with BNSF, Canadian National and Canadian Pacific leading the way; others were mostly negative.

Source: Class I websites and personal database, carloads carried

Motor vehicle and equipment performance improved by six percent during December YOY, versus the flat performance during November. Performance for Class Is varied substantially with BNSF and Kansas City Southern growing by 25 percent or better, Canadian National growing by 12 percent, CSX growing by 11 percent and Canadian Pacific declining by over 25 percent. All others witnessed marginal performance.

Source: Class I websites and personal database, carloads carried

Using a zoomed-in graphic excluding coal above helps paint the picture for both motor vehicles and equipment and grain's recent positive performance; the last two weeks typically witness seasonal gyrations. It also illustrates chemicals' recent up-trend and petroleum's continued downward spiral.

Grain performance remained strong up nearly eight percent during December YOY, versus the 16.6 percent gain during November. Performance was mixed with Kansas City Southern and Union Pacific up over 25 percent, BNSF up seven percent, Norfolk Southern up 5.5 percent and the Canadian rails marginally positive. CSX was once again the only Class I in negative territory down seven percent.

Source: Class I websites and personal database, carloads carried

Petroleum performance remained weak, declining -19 percent during December YOY, versus the -14 percent decline during November. Petroleum traffic has declined all twelve months during 2016 at 14 percent or greater. During December YOY, all Class Is were negative with the majority down near or easily over 20 percent versus 2015 with the exception being Canadian National, which was down only one percent. Crushed stone, gravel and sand has now underperformed petroleum for five of the past six weeks, breaking the previous 24-week streak.

Based on the performance by individual Class Is, coal, motor vehicles and equipment and grain have continued to lead the improvement for carload traffic performance. Chemicals have had moments of increases and declines; but has remained largely flat for the year. Petroleum's decline has remained weak. Investors should continue to monitor these top five commodity trends as they reflected nearly 62 percent of carload traffic for the year.

Source: Yahoo! Finance

Last year was a great year for performance for all Class I rail stocks with all returning double-digits excluding dividends, and only Canadian Pacific and Kansas City Southern returning below 20 percent. At the start of 2017, some diversion has occurred with stock prices. The Canadian stocks, CSX and Norfolk Southern are all off to a solid start, up two to three percent. But both Kansas City Southern and Union Pacific have been negative at -3.7 and -1.5 percent.

Kansas City Southern continues to struggle, stemming from president-elect Donald Trump's statements regarding the North American Free Trade Agreement, NAFTA. These statements have turned into a negative tangible impact as Ford Motor Company (NYSE:F) recently decided to forgo its plans to develop a new plant in Mexico, which would be directly served by Kansas City Southern. The capacity of this new plant has been estimated to have been at approximately 36 percent of the five new plants coming online in 2017 through 2021; there are now four planned.

General Motors (NYSE:GM) and Toyota Motor Corporation (NYSE:TM) have both been singled out by President-elect Donald Trump to not build new automobile facilities in Mexico if they do not want to face high taxes for finished goods.

Class Is find themselves in a mixed-bag situation heading into fourth-quarter earnings. On the one hand, rail traffic has substantially improved from the March/April bottom, which could lead to stronger revenue and earnings performance versus estimates.

But earnings will be coming up right before President-elect Donald Trump is sworn into office. Once in office, Trump will have his first 100 days where he will be held accountable for the promises he made during his presidential campaign.

For rail stocks, this means that international trade may face some initial challenges with perceived transitions based on rhetoric. Companies and countries have already made statements to curtail, shift and at the least, work with Trump. Investors should be thinking long and hard about the share of intermodal revenue for Class Is, which is largely driven by international trade. Any extension of taxes on goods entering the U.S. from seaports will affect all Class Is.

It is highly likely that NAFTA will be re-negotiated. I am thinking that Trump will look for big-ticket wins like preserving or adding 500 to 1,500 jobs in the U.S. at major production facilities. This is why he is initially targeting the automobile industry. But as we are learning from his tweets, no company is safe from scrutiny.

The positive flip side to Trump's perceived changes also includes potential tax reform. This could serve as a strong benefit for companies like rail operators at significantly improving earnings and free cash flow. Additionally, Trump has at least four years of work time. The current supply chain structures can shift, but not cataclysmically. This would suggest that companies exposed to Mexico like Union Pacific and Kansas City Southern may see either marginal traffic growth or a decrease in traffic growth in Mexico over the near term, but the net benefit of tax reform could still propel fundamental performance.

My top four rail stocks to own continue to be Union Pacific, Canadian National, Canadian Pacific and Kansas City Southern. Every stock has its price as far as making money, but these four rail operators have the strongest operating efficiency and profitability. With the uncertainty surrounding what policies will look like over the next few months, I am likely to take a wait-and-see approach to the rail industry. Then again, depending on volatility, there could be some buying opportunities which emerge.

Appendix

The following appendix provides snapshot trends for each Class I rail operator. Investors should be mindful that the total traffic includes carloads and intermodal units carried. Carloads and units carried include both originated and received railcars. Therefore, the total railcars carried double counts railcars across Class Is, IIs and IIIs. As an example, a 40-foot international container imported from Long Beach could be hauled by BNSF to Chicago. At this point, the container could be interchanged to any East Coast or Canadian Class I to be distributed to its final destination.

Investors seeking to keep an update on unique rail traffic growth should either subscribe to, or at a minimum review the American Association of Railroads, AAR data center and weekly updates. This information provides only the traffic which is originated by all railroad Classes.

The value of reporting and following the rail traffic carried is that BNSF, as an example, will generate revenue from its own carload on its network, or any other Class I or other railroad's carload, as long as it traverses its network. There is a correlation between rail traffic which is only originated compared to that which is carried. Therefore, more railcars moving across multiple rail networks increases freight revenues for all rail operators, especially Class Is which carry a substantial amount of railcars at some point between origins and destinations.

In addition to the monthly rail traffic carried results for each Class I below, speeds by service type and rail classification yard dwell times are provided.

BNSF

Source: BNSF rail carloads carried and personal database

Source: BNSF rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Canadian National

Source: Canadian National rail carloads carried and personal database

Source: Canadian National rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Canadian Pacific

Source: Canadian Pacific rail carloads carried and personal database

Source: Canadian Pacific rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

CSX

Source: CSX rail carloads carried and personal database

Source: CSX rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Kansas City Southern

Source: Kansas City Southern rail carloads carried and personal database

Source: Kansas City Southern rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Norfolk Southern

Source: Norfolk Southern rail carloads carried and personal database

Source: Norfolk Southern rail intermodal units and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Union Pacific

Source: Union Pacific rail carloads carried and personal database

Source: Union Pacific rail intermodal units carried and personal database

Source: AAR Railroad Performance Measures and personal database

Source: AAR Railroad Performance Measures and personal database

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UNP, CP, KSU over 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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here