Railroads: Low Coal Demand, Oil Price Slump Play Spoiler

Declines in coal shipments and oil prices have been major disappointments for the freight railroad industry. Owing to the mature nature of the industry, railroads require steady investments to maintain competitiveness, which in turn makes it susceptible to a few external and internal challenges.

Also, rail-based companies need to access the capital market on a regular basis, which makes them vulnerable to hiccups in the credit markets as is the case at present in the high-yield bond space. Moreover, the cyclical nature of business coupled with stringent government regulations and volatile exchange rates continue to indicate caution.

Below, we discuss key factors which investors should consider while investing in railroad stocks:

Sluggish Coal Demand

Coal accounts for majority of the business for railroad operators. Thus, a decline in coal demand hurts profits for these carriers to a large extent. Meanwhile, coal also forms a key element for electricity production. However, falling fuel prices has made natural gas a more economic option for electricity generation.