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AAR's Bullish Traffic Data Supports U.S. Railroads' Recovery

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The gradual upturn in economic activities in the United States following relaxation of restrictions and increased inoculation drives has been a huge positive for railroads this year so far. An economy on the mend also supports the overall bullishness surrounding the railroad operators as it implies that more goods are being transported across the United States. Riding on this positivity, the Zacks Transportation- Rail industry has appreciated 8% year to date.

Zacks Investment ResearchImage Source: Zacks Investment Research

AAR Data Shows Continued Recovery in Rail Traffic

The rail traffic data released by the Association of American Railroads (AAR) for the week ended Jun 12, 2021 suggests that total traffic (carloads + intermodal units) increased 17.9% compared with the same-week tally in 2020. Per the report, carloads rose 21.8% with growth witnessed across all 10 carload commodity groups. A double-digit improvement was registered across most groups with the likes of Metallic Ores and Metals, Coal and Chemicals being the top performers.

Moreover, intermodal volume jumped 14.8% to 288,007 containers and trailers on a year-over-year basis. Notably, railroads are experiencing robust intermodal volumes, courtesy of the pandemic-driven hike in e-commerce demand. For instance, CSX Corporation’s (CSX - Free Report) intermodal volumes grew 10% year over year in the first quarter of 2021, which in turn, led to an 11% rise in intermodal revenues. With intermodal volumes continuing to display impressive growth as highlighted by the AAR data, the same should drive railroad’s second-quarter 2021 results as well.

Notably, CSX currently carries a Zacks Rank #3 (Hold). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Working in Favor of Railroads?

The constructive environment with respect to freight in the United States is a huge positive for the railroad operators in the country. Sunny prospects of the freight scenario can be gauged by the  latest Cass Freight Shipments Index report, according to which shipment volumes surged 35.3% on a year-over-year basis in May. Notably, this record May uptick was higher than the 27.6% year-over-year ascent reported in April and the 10% jump registered in March. This is a huge booster for the railroads as freight revenues account for bulk of their top lines.

Apart from the rosy freight scene, the constant efforts of railroad operators to trim costs and enhance efficiencies, owing to the precision scheduled railroading (PSR) model adopted by the likes of CSX, Union Pacific Corporation (UNP - Free Report) , Norfolk Southern Corporation (NSC - Free Report) and Kansas City Southern (KSU - Free Report) , are supporting the bottom line, thereby aiding growth. Notably, at Kansas City Southern, which might be acquired by the Canadian railroad operator Canadian National Railway (CNI - Free Report) next year, PSR initiatives contributed directly to its 2020 operating expense savings of $96 million.

With the resumption of economic activities, many companies including some transport service providers are reactivating their shareholder-friendly measures. Notably, the likes of Union Pacific, CSX and Norfolk Southern announced raises in their quarterly dividend payouts this year.

The Road Ahead

We expect railroads to continue performing well in the remainder of 2021, driven by further progress in the freight scene. Rail traffic should keep increasing in the coming weeks as economic recovery picks up its pace on the back of ramped-up vaccination rollouts. Intermodal volumes are anticipated to be particularly strong in the remaining part of the year.

The benefits of reduced costs and better efficiency from the PSR model are likely to drive the bottom line. Efforts of cost control should also lead to further improvement in the operating ratio (operating expenses as a % of revenues), which is a keenly watched metric for all the railroads.

 

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