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December U.S. Rail Traffic Up 4.4%: More Gains Ahead in 2021?

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It is common knowledge that the health of the railroads is tied to the prevalent state of the economy. Consequently, lockdowns and other disruptions caused by coronavirus dealt a serious blow to the participants of the Zacks Transportation – Rail industry with low freight volumes playing spoilsport. The COVID-19 outbreak crippled the shipment of goods not only across the United States but also globally.

Evidently, results of railroads in the United States were hurt by declining volumes in each of the first three quarters of 2020. For example, freight revenues at Union Pacific Corporation (UNP - Free Report) declined 13% in the first nine months of 2020, mainly due to coronavirus-induced depressed volumes (down 10%). Volume woes due to reduced industrial activity also dented the performances of other U.S.-based railroad operators like Norfolk Southern Corporation (NSC - Free Report) and CSX Corporation (CSX - Free Report) .

All three above-mentioned stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, with the gradual re-opening of the economy, volumes — though down year over year — have been improving for a while now. This bodes well for the railroads.

AAR Data Reflects Improvement

The overall traffic data in the United States released by the Association of American Railroads (AAR) constantly shows improvement in intermodal volumes over the past few weeks.

The latest data released by AAR shows that the overall traffic (carload+ intermodal) for December increased 4.4% year over year to 2,435,819. While carload traffic slid 3.7% to 1,101,324 carloads, intermodal rose 12.2% or 145,126 units. Notably, intermodal strength outweighed the weakness in carload traffic, thereby bumping up the overall traffic.

Per AAR Vice President John T. Gray, "By the end of the year, rail traffic was close to pre-pandemic levels”. The uptick was driven by the improved shipments of grain and intermodal in addition to the reopening of auto assembly plants as the economy regains momentum.

In fact, grain shipments are consistently strong in Canada as well with railroads like Canadian Pacific Railway Limited (CP - Free Report) and Canadian National Railway Company (CNI - Free Report) setting records for grain transportation in 2020.

The year-over-year increase in shipment volumes for October and November as  established by the two recent Cass Freight Shipments Index reports reflect that freight volumes are on the mend in North America.

What’s in Store for Railroads in 2021?

Vaccines against coronavirus are already available with inoculation drives in the process. As the year progresses, more and more people across the globe will be getting the shots and hopefully, the vaccines currently being developed, will also get a regulatory approval.

In view of the above expectations, it is fair to assume that economic activities will improve further as more and more people join work without the fear of contracting the infection. Increased economic activity bodes well for the railroads and an already bettering freight scenario should gain a further momentum.

In fact, the anticipation of an uptick in rail volumes led Moody’s Investor Services to upgrade its outlook to stable from negative for the North American rail industry. The company expects revenues to grow 4.25-6% in the current year or so on the back of rising freight volumes. Volume growth is expected to be driven by intermodal. Moody's predicts that growth in shipments of most freight types will pick up going forward.

Apart from the projected surge in freight volumes, the constant efforts of railroads to cut costs and improve efficiencies should drive the bottom line further, thereby aiding growth in the current year. The adoption of the precision-scheduled railroading modelby railroads like Union Pacific, Norfolk Southern, CSX and Kansas City Southern (KSU - Free Report) is ramping up efficiencies for these companies.

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