What are the railroads telling us?

The automobile business is strong. So is construction, based on shipments on the nation's railroads. Crude oil is a hot commodity. Coal is suffering from low prices.

By Charley Blaine May 13, 2013 9:42PM
You can't make a car, a computer, a lovely evening dress or sell, say, potatoes, unless you can get your goods to the customer. And if the customer isn't interested, the goods won't ship.

That's why analysts and economists watch transportation stocks so closely. Historically, they functioned as a leading indicator of what's happening in the economy.

And what the transports are saying is that, for now, the economy may be better than anyone thinks. The Dow Jones Transportation Average ($DJT), the oldest U.S. stock index, closed at a record 6,411. They've dipped a touch since but finished Monday at 6,344.

The index is up 19.6% this year, compared with the Dow Jones industrials' ($INDU) 15.1% or the 14.5% gain for the Standard & Poor's 500 Index ($INX). In fact, 18 of the 20 stocks in the Dow Transports are higher this year.

Is that insane? Yes and no. Airline stocks are the biggest reason why the Dow transports are so strong this year. They're up because airlines are taking planes out of service or merging, and they're getting fare increases to stocks. And, with at least stable fuel costs, airlines are starting to make money. (Not that they've made the experience of flying particularly enjoyable.)

The four top stocks in the Dow transports this year are airlines: Alaska Airlines (ALK), Delta Air Lines (DAL), United Continental Holdings (UAL) and Southwest Airlines (LUV). Alaska is the leader, up 53%.

But the railroads are the better gauge of judging the strength of the sector and may offer a clearer insight into the economy. Shares of Kansas City Southern (KSU), CSX (CSX) and Norfolk Southern (NSC) are up 33.5%, 28.3% and 26.8% this year, respectively. Union Pacific (UNP) is up 22.4%.

What's giving the railroads their push is cyclical traffic: autos, trucks and construction materials and chemicals. If anything, the business confirms the reasonable strength in autos and in what appears to be growing strength in housing.

Also strong is intermodel traffic: containers filled with furniture, computers and other products. This group strongly correlates to overall consumer demand, according to the ASI/Transmatch Railfax Report.

Baseline traffic -- commodities, grain and foods -- has been struggling for the last few years. That's because the biggest portion of business in the sector is coal, and coal prices have been hammered by the big break in natural gas prices. If it's a contest between relatively dirty coal and low-priced natural gas, gas wins.

Crude oil from the Bakken Shale region of North Dakota as well as the Barnett Shale and Permian Basin in Texas is likely to generate new business for railroads -- that can transport it to refineries along the Mississippi River and the Gulf Coast from Houston to Pascagoula, Miss.

North Dakota is now one of the top oil-producing states, but there aren't many pipeline networks that can transport the crude. And getting regulatory approvals isn't easy.

In addition, the development of oil deposits in Albertan tar sands means more crude oil getting shipped to the West Coast. (This is to the dismay of environmentalists, but money is speaking louder.)

While the cost of shipping on railroads is five times higher or more than via pipelines, railroads can move more quickly and are doing so.  Zacks Investment Research sees Kansas City Southern, Norfolk Southern and the Canadian National Railway (CNI) could  win the most business from shale oil shipments.

Kansas City Southern is also likely to benefit from the expansion of auto manufacturing plants in Mexico near the U.S. border. Honda Motor (HMC), Nissan (NSANY), Audi and Mazda are making investments that could boost production in the region by up to 35%, Zacks says.

All that said, the transportation stocks are trading just below record levels. Like the Dow, S&P 500 and the Nasdaq Composite Index ($COMPX), they are also trading at levels that suggest they may be overbought, at least for now. So, waiting to buy might be a good tactic. But if the economy continues to improve, those stocks could head higher.

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20Comments
May 14, 2013 11:21AM
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Wonder why Buffet bought a railroad?
May 14, 2013 7:43AM
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More trains equals less trucks. I'm all for that.
May 14, 2013 4:55PM
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There may be too many assumptions here.  First, it assumes that higher stock price equals more economic activity.  Tonnage is not addressed, only stock price.  Second, it ignores two transportation sectors that also are good indicators of economic activity:  truck and domestic waterborne freight.  Waterborne freight has a significant component of grain, iron ore and coal.  Trucking moves freight at every level of production, from raw commodities to finished products and because of that, is a better indicator of economic activity.  Third, the writer looks at airlines as a whole and discusses passenger miles, but ignores air freight (including FedEx and UPS), which is another good index of economic activity.

 

For those who wish to invest in "transportations", this article is very light on analysis.  For those who wish to use "transportations" as an indicator of general economic conditions, this article is useless.

May 14, 2013 4:27PM
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WHY should the TAX PAYER pay for high speed trains?   LOL go get investors.   The reason they haven't been built is we are a car nation and it would lose money just like Amtrack....
May 14, 2013 5:04PM
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I just read over this briefly, but is Charley suggesting that just the price levels of Dow Transport stocks, specifically railroad stocks, are a good indication of a "better-than-expected' recovery?  C'mon Charley, if there was ever a time to be wary of what stock prices were telling us, now would be it.  Where's the hard data?  Are container shipments up and by how much?  Are rail yards expanding and by how much?  If you look at the 5 yr data on the Railfax Report, it doesn't look that great.

Once again, after what we've been through, there should be so much pent up demand that GDP should easily be humming along at 5-6%, and we're not seeing anything close to that, even after all the trillions in fiscal and monetary stimulus.

May 14, 2013 9:41AM
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Load 'em up, head'em out, haul it away.....Rollin',rollin', rollin' yahooooooooo!!
May 14, 2013 4:43PM
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40% of all new car and 70% of all used car loans are subprime.
May 14, 2013 6:07PM
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Having been involved in Shipping a while back, didn't care for ownership and Headquarters Operations, but some might do okay?...We got out.

 

Another way to play Shipping....Is Container makers and maintenance.

Another way to play Railroads, ..Is people that make them or parts.

May 14, 2013 5:23PM
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If you paid attention to this last year, you could have made a bunch of money.
May 14, 2013 3:32PM
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I want more airline competition.  I have not taken several trips this year because of the miserable, crowded, uncomfortable, smelly, overly expensive airlines.  I don't mind security--it's the GD airlines I hate.
May 14, 2013 6:13PM
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Coal shipments are picking up again...

And oil to be shipped, until more pipelines are in place...ie; above article.

Don't know if LNG can be shipped, maybe ??

 

Expect to see more shipments and railcar production.

May 14, 2013 6:02PM
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Different times in our History, Railroads have been superb investments..
Buffet's investment was pretty good timing, maybe?

I do believe RRs should pay better dividends, but then again they can be cyclical or have downturns because of drops in loads or passenger counts...

Even the EPA's decision on Coal and Enviromental Standards had an effect..

 

Other effects to look at are, a pick-up after Recessions...Traffic gets heavier.

And if you haven't read it, Commuters have gained a lot on AmTrak because of energy costs.

So buying in on dips, with more traffic returning, may well pay off..?

Yes we own a popular line, American, with about a 15% appreciation and 3% div..

And Buffet was one of the things I considered, going in...But not his..

May 14, 2013 5:25PM
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Also remember, 95% of all trade involves some type of sea transportaton.
May 14, 2013 3:34PM
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Where are the high speed passenger railroads?  Do I have to go to China for a decent ride?  Europe?  If we built some new transportation infrastructure, we might put some folks back to work.
May 14, 2013 3:59PM
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"Where are the high speed passenger railroads?"

 

Shot down by the Party of NO about 350 filabusters ago. Seriously. How dumb will this get? Make all kinds of post-working years deadbeats and their irresponsible offspring RICH infusing money our kids will owe for centuring, waste the Great Lakes FRACKING SHALE to keep classic cars smogging up roads we can't afford to fix but... redesign the national infrastructure around high-speed rail? NO WAY. It's un-American. Where's my assault rifle so I can go blame Obama?

WHEN WILL YOU GEEZERS LET THE NATION GO SO WE CAN RECOVER WHAT'S LEFT OF IT?

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