Coal, Intermodal Lead Railroads’ Resurgence

Railroads are riding high in 2017 after years of struggle, primarily due to declining coal shipments. The improving fortunes of railroad operators are well reflected by the 29.3% improvement in the Dow Jones U.S. Railroads Index on a year-to-date basis.

Railroads Aided by Coal Revival

Behind this revival is primarily the improving scenario pertaining to coal. In fact, President Trump’s pro-coal stance is a huge positive for railroads, given their significant dependence on the commodity for revenue generation. We note that coal had lost significance as a source of fuel during former President Obama’s tenure. 

Now, President Trump’s plans to shift focus to traditional energy businesses such as coal is expected to aid railroads, whose fortunes are tied to a great extent to coal. Moreover, in March 2017, Trump signed an order to repeal the Clean Power Plan. More recently, Trump walked out from the Paris climate agreement.

The revival of coal can be made out from the impressive performances of most sector participants with respect to the commodity in the third quarter of 2017. For example, at Norfolk Southern Corp. (NSC – Free Report) coal revenues (freight) increased 13.1%, while the same at CSX Corp. (CSX – Free Report) rose 10% year over year owing to 5% expansion in volumes. At Kansas City Southern (KSU – Free Report) , revenues improved 19% at the energy segment on the back of impressive performances at the Utility Coal, Frac Sand and Crude Oil units.

All the above-mentioned stocks carry a Zacks Rank #3 (Hold).

Intermodal Volumes Also Showing Strength

Apart from coal, the intermodal unit is also seeing good times this year after a lackluster 2016. According to the Intermodal Association of North America (IANA), intermodal volumes improved 2% year over year in the first quarter of 2017.

The scenario improved further with intermodal volumes rising 4.5% in the second quarter and 6.3% in the third quarter, on a year-over-year basis. This was the highest growth rate recorded in more than three years. Volumes on the international as well as domestic fronts touched record highs during the quarter. The positive readings certainly support the buoyant picture surrounding railroads.