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Can Freight Railroads Maintain Momentum Through 2018?
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The robust financial health of railroads bears testimony to the fact that the scenario has improved considerably for players in this industry despite coal-related headwinds. This indicates that freight railroad stocks will provide good returns in the long-haul.
Strong U.S. Economic Fundamentals
The thriving U.S. economy is highly conducive to growth of railroads. The improved scenario is evident from U.S. GDP’s record growth of 3.2% in the first half of 2018, surpassing the target of 3% set by the Trump administration.
Economic growth and demand for freight are positively correlated. With high freight demand, the industry clearly stands to gain. Moreover, on Sep 6, the Fed raised GDP growth forecast for 2018 and 2019 from 2.8% and 2.4% stated in June to 3.1% and 2.5%, respectively.
Robust Intermodal Businesses
Intermodal segment has improved significantly in 2018. Second-quarter intermodal volumes rose 6.2% year over year and 4% sequentially. Also first-quarter intermodal volumes climbed 7.2% from the year-ago quarter’s tally. Strong intermodal volumes have been bolstering railroads’ top line and the uptrend is likely to continue going forward. Further, the railroad operators’ sustained cost-reduction efforts are anticipated to drive the bottom line going forward.
Healthy AAR Data
The Association of American Railroads (“AAR”), the industry body of the class 1 freight railroad operators, reported that U.S. rail traffic (including carloads and intermodal units) stood at 554,238 for the week ended Oct 6, 2018. This reflects an increase of 1.2% year over year. Six of the 10 carload commodity groups posted an increase compared with the same week in 2017. Total U.S. rail traffic for the first 40 weeks of 2018 was 10,518,193, up 2% year over year.
Additionally, railroads have witnessed an improvement pertaining to another key metric -- operating ratio (operating expenses as a percentage of revenues) in 2018. The lesser the value of operating ratio, the better, as it implies that more cash is available to the company to reward shareholders through hike in dividends or share buybacks.
Performance of Major Railroads
Year to date, stock price of six major railroad operators, Union Pacific Corp. (UNP - Free Report) , Canadian Pacific Railway Ltd. (CP - Free Report) , CSX Corp. (CSX - Free Report) , Norfolk Southern Corp. (NSC - Free Report) , Canadian National Railway Co. (CNI - Free Report) and Genesee & Wyoming Inc. outperformed the benchmark S&P 500.
Bottom Line
The railroad industry seems to be poised well not only in the near term but also in the long haul due to robust freight demand on the back of a buoyant economy. Further, improving prospects of key metric like intermodal has been benefiting railroads since the beginning of the year. These positives will drive the stock price of freight railroad operators further.
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Can Freight Railroads Maintain Momentum Through 2018?
The robust financial health of railroads bears testimony to the fact that the scenario has improved considerably for players in this industry despite coal-related headwinds. This indicates that freight railroad stocks will provide good returns in the long-haul.
Strong U.S. Economic Fundamentals
The thriving U.S. economy is highly conducive to growth of railroads. The improved scenario is evident from U.S. GDP’s record growth of 3.2% in the first half of 2018, surpassing the target of 3% set by the Trump administration.
Economic growth and demand for freight are positively correlated. With high freight demand, the industry clearly stands to gain. Moreover, on Sep 6, the Fed raised GDP growth forecast for 2018 and 2019 from 2.8% and 2.4% stated in June to 3.1% and 2.5%, respectively.
Robust Intermodal Businesses
Intermodal segment has improved significantly in 2018. Second-quarter intermodal volumes rose 6.2% year over year and 4% sequentially. Also first-quarter intermodal volumes climbed 7.2% from the year-ago quarter’s tally. Strong intermodal volumes have been bolstering railroads’ top line and the uptrend is likely to continue going forward. Further, the railroad operators’ sustained cost-reduction efforts are anticipated to drive the bottom line going forward.
Healthy AAR Data
The Association of American Railroads (“AAR”), the industry body of the class 1 freight railroad operators, reported that U.S. rail traffic (including carloads and intermodal units) stood at 554,238 for the week ended Oct 6, 2018. This reflects an increase of 1.2% year over year. Six of the 10 carload commodity groups posted an increase compared with the same week in 2017. Total U.S. rail traffic for the first 40 weeks of 2018 was 10,518,193, up 2% year over year.
Additionally, railroads have witnessed an improvement pertaining to another key metric -- operating ratio (operating expenses as a percentage of revenues) in 2018. The lesser the value of operating ratio, the better, as it implies that more cash is available to the company to reward shareholders through hike in dividends or share buybacks.
Performance of Major Railroads
Year to date, stock price of six major railroad operators, Union Pacific Corp. (UNP - Free Report) , Canadian Pacific Railway Ltd. (CP - Free Report) , CSX Corp. (CSX - Free Report) , Norfolk Southern Corp. (NSC - Free Report) , Canadian National Railway Co. (CNI - Free Report) and Genesee & Wyoming Inc. outperformed the benchmark S&P 500.
Bottom Line
The railroad industry seems to be poised well not only in the near term but also in the long haul due to robust freight demand on the back of a buoyant economy. Further, improving prospects of key metric like intermodal has been benefiting railroads since the beginning of the year. These positives will drive the stock price of freight railroad operators further.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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