Will Railroads Continue to Suffer on Coal Issues?

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Coal is a key revenue-generating commodity for railroad operators. Naturally, the decline in domestic coal shipments have contributed big time to the dismal performance by U.S.-based railroad stocks so far this year. The struggles of the railroad operators have been exemplified by the 27.9% year-to-date decline in the Dow Jones U.S. Railroads Index.

According to the U.S. Energy Information Administration, coal exports have been soft mainly due to low fuel prices and weak global fuel demand. Increased output from other coal-exporting nations too has led to the current gloom.

Rail Traffic Data Highlights Woes

The American Railroads' (AAR) latest U.S. rail traffic report (for week ended Sep 19, 2015) reveals a 2.5% year-over-year decline in rail traffic (sum of total carloads and intermodal units). While total carloads for the week declined 5.5% to 285,320, intermodal volume was 281,414 containers and trailers, up 0.6% year over year. Six of the 10 carload groups posted weekly declines leading to the sorry picture with metallic ores/metals, petroleum products and coal showing the sharpest drops.

The year-to-date data unveiled by AAR is also disappointing with a 4.4% decline in total carloads and coal posting the steepest (9.2%) drop. Overall rail traffic is down only 1.1% year to date, thanks to the 2.5% gain in intermodal traffic.

In view of the above data, it can be said that coal has turned into a splitting headache for railroad operators. While exports continue to be affected by the strong dollar, softness in the energy sector has encouraged utilities to switch to burning natural gas (which is much cheaper).

U.S. Railroads Down

Coal-related headwinds are primarily responsible for share prices of the bigwigs in the U.S. railroad space shedding value this year. While shares of the Jacksonville, FL- based CSX Corporation CSX have declined 26.8% on a year-to-date basis, the Omaha, NE-based Union Pacific Corporation UNP is down almost 20% so far this year.

Furthermore, shares of Norfolk Southern Corporation NSC which is headquartered in Norfolk, VA and the Kansas City, MO-based Kansas City Southern KSU have declined 27.23% and 11.72% respectively on a year-to-date basis. The double-digit year-to-date decline witnessed in the Dow Jones transportation average index is primarily due to the below-par showing of the railroad operators.

Lackluster Q2 on Coal Woes

Needless to say, soft coal revenues resulted in CSX Corp., Norfolk Southern, Kansas City Southern and Union Pacific Corporation reporting lower-than-expected revenues in the second quarter of 2015.

Apart from the strength of the U.S. dollar, lower fuel surcharges received from customers due to declining fuel costs and slow carload growth from the energy sector thwarted top-line growth of the already beleaguered railroads in the quarter.

2H15 to Chug Along a Bumpy Track

That the road ahead is also a gloomy one for railroads was made out from the bearish third-quarter as well as full-year 2015 forecast by CSX Corporation at the Cowen and Company 8th Annual Global Transportation Conference earlier this month. The company stated that it expects the backend of the year to be more challenging than the first half due to intensifying coal headwinds. The railroad operator has projected declines from domestic coal revenues in excess of $400 million in 2015.

The company also said that overall volumes were down on a year-to-date basis with both domestic coal and merchandise markets performing below expectation. With coal-related headwinds expected to impact the company's fourth-quarter results too, CSX Corporation now projects 2015 earnings per share to grow in the mid single-digits range (old projection: mid-to-high single-digit growth).

Union Pacific also believes that weak coal shipments will continue to hurt the company for the rest of the year with no improvement expected in the near term. The company did not give any coal-related guidance for 2016 earlier this month at the Morgan Stanley 3rd Annual Laguna Conference.

Norfolk Southern also painted a gloomy picture related to coal shipments at the 2015 Citi Industrials Conference earlier this month. The railroad operator revealed that coal volumes are down 17% so far in the third quarter (data considered till Sep 12, 2015).

Weak energy markets, apart from currency headwinds had forced Kansas City Southern to withdraw its 2015 revenue and volume outlook at the Bank of America Merrill Lynch 2015 transportation conference.

With declining coal shipments hurting the top line and woes likely to continue, the struggling railroads are looking to cut costs to drive bottom-line growth. For example, according to an Associated Press report last month, Union Pacific intends to eliminate multiple management jobs. While these are stopgap measures, how well the railroads tackle the problem of dirty coal remains to be seen.

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KANSAS CITY SOU (KSU): Free Stock Analysis Report

CSX CORP (CSX): Free Stock Analysis Report

UNION PAC CORP (UNP): Free Stock Analysis Report

NORFOLK SOUTHRN (NSC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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