Rail Executives Gathering to Address Investor Concerns

By Laura Stevens 

Railroads have been losing steam this year, weighed down by falling commodity volumes, and there is little hope of improvement on the track.

Rail executives from CSX Corp., Norfolk Southern Corp. and Union Pacific Corp. this week will address investor concerns at a time when an economic slowdown in China is fueling worries about global economic growth. Those executives and others will be appearing Wednesday and Thursday at the Cowen Group Inc.'s Global Transportation Conference in Boston.

"Rails have become a lot more reliant upon commodities to fuel growth, much more so than in years past. Consequently, China does play a role," said Mark Levin, a rail analyst with BB&T Capital Markets. "Commodity price moves are largely dictated by China's consumption."

Coal demand has fallen 9% for rails so far this year as more power plants switch to natural gas. Declining oil prices turned the boom in shipping crude-by-rail into a bust, with petroleum and related product shipments down 5% this year. And the railroads' metal business is hurting, too, as natural-gas and oil producers need fewer pipes for drilling and imports become cheaper.

As a result, rail stocks are down an average 26% so far this year, according to BB&T Capital Markets, erasing last year's 22% increase. Since the start of July, the stocks are down about 9%, BB&T Capital said.

The decline in rail volumes has hit profits, too. Norfolk Southern in July reported a 23% drop in second-quarter profit to $433 million, adding that declining revenue from coal, crude oil and fuel surcharges would pressure results for the second half of the year. Union Pacific's profits dropped 7% to $1.2 billion in the same quarter.

While CSX reported that cost-cutting helped fuel a 4.5% rise in its quarterly profit, it issued a similar warning on coal.

Executives speaking at the Cowen conference are also likely to highlight efforts to scale back their networks to accommodate lower volumes and cost-cutting measures like furloughing employees and storing trains.

The rails are likely to provide a better "understanding of where they are getting the rail costs in line with the volume," said David Vernon, an analyst with Sanford C. Bernstein & Co. "If the volume starts to moderate and finds the floor, they should be able to catch up with it."

Much of the problem stems from booms in cargo last year, when traffic volumes increased 4.5% across the board and railroads scrambled to add resources to accommodate the gains and to keep cargo moving. But as energy prices declined this year, volumes were hit, raising the question of whether pricing can hold up.

Railroads have been competing with trucking for intermodal volume, or the transportation of trailers and containers. That type of volume is up 2.6% so far this year, but as fuel prices fall, trucking has become more competitive with rails.

Still, rail "pricing is still very strong, and even accelerating," said Justin Long, a Stephens Inc. analyst who met with the major railroads in recent days. "From a service perspective, too, things are getting better."

The Week Ahead looks at coming corporate events.

Write to Laura Stevens at [e-mail]

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September 05, 2015 05:44 ET (09:44 GMT)

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