The Association of American Railroads (AAR) continued to show gains in rail traffic in its November monthly report. The holiday shopping season had a great start this year, with retail sales up 16% during the Thanksgiving weekend and online sales increasing by 26% on Black Friday compared to last year. The demand to move goods within the country will benefit freight carriers such as Norfolk Southern (NSC), CSX (CSX) and Union Pacific (UNP).

Elevated fuel prices and limited truck capacity have also altered the way goods are transported, benefiting railroads, which provide a sustainable solution to carrying goods at reasonable rates.

See our full analysis of Norfolk Southern's here | CSX's stock here.

According to the AAR report, U.S. railroad carloads increased by 2.3% and intermodal traffic was up 3.8% in November 2011 compared to last year. Around 13 of the 20 commodities tracked registered gains, with motor vehicles and parts, crushed stone, gravel and sand, and coal recording 18.7%, 12% and 1.3% gains, respectively. As one of the major carrier of auto and vehicle parts, Norfolk is gaining from pent-up demand.

As delivery companies such as UPS and FedEx use rail carriers to move packages over long distances, we believe this may expose railroads to the cyclical nature of consumer demand. Given the uncertain economic climate and shaky consumer confidence, this exposure may be unwelcome to carriers that mainly ship more stable demand goods such as coal, industrial and agricultural products.

Our price estimate for Norfolk Southern is $91, which is around 25% ahead of the current market price.