Coal Under Threat by Low Natural Gas Prices; Will This Be the End for Railroad Stocks?
Friday, April 19th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
Because 40% or so of total U.S. railroad tonnage is coal—the most important commodity for railroad stocks—the railroad sector is under threat by low natural gas prices.
According to the Association of American Railroads (AAR), the shipping of coal is responsible for about one in five railroad jobs.
One of the first railroad stocks to report its earnings this season was CSX Corporation (NYSE/CSX), based in Jacksonville, Florida. CSX’s numbers were flat, but it beat consensus.
CSX reported first-quarter revenues of $3.0 billion, with growth in merchandise, intermodal, and other sales offsetting a decline in coal shipments.
Earnings were a record $459 million, or $0.45 per share, compared to $449 million, or $0.43 per share. The company increased its quarterly dividend by seven percent and announced a new $1.0-billion share buyback program.
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CSX said that it expects average annual earnings-per-share (EPS) growth of 10%–15% starting from the end of this year to 2015 (a positive). Earnings for fiscal 2013 are expected to be flat or down compared to 2012 (a negative, and below the previous average earnings estimate if that’s meaningful).
Among railroad stocks, CSX is less than half the value of Union Pacific Corporation (NYSE/UNP), which is my benchmark stock for the group.
The AAR releases a lot of statistics that are very useful, even outside the universe of railroad stocks. In 2012, railroads delivered 171,000 carloads of oil and petroleum products for a gain of 46% over 2011. This was less than the trade group previously expected.
According to the U.S. Energy Information Administration, U.S. crude oil production increased by a record 780,000 barrels per day in 2012. About 90% of this oil was transported by pipeline.
This agency also reported that railcar loadings of coal were down about 726,000 carloads, nearly 11%, to just over six million carloads in 2012. This decline is an ongoing issue for railroad stocks.
Still, the group has been very good at maintaining its earnings in light of declining shipments of coal. Railroad stocks are cyclical, but they’ve done very well to create more stability in their businesses. (See “Keeping It Rolling—U.S. Energy Boom Good News for Railroad Stocks.”)
CSX’s dividend boost was welcome news, and so was its earnings stability. The stock is currently yielding about 2.3%. The new dividend is $0.15 per share, payable on June 14 to shareholders of record on May 31.
The fact that CSX was able to do such a good job controlling costs is an important metric for shareholders. The company reported that it significantly reduced its materials and supplies expenses, while fuel costs were flat with the comparable quarter. Coal shipment revenues were down 13% to $832 million.
I continue to like railroad stocks and the industry as a whole. As more earnings are reported, it’s worth perusing their FORM 10-Qs (quarterly reports mandated by the Securities and Exchange Commission). The shipment of goods is an excellent barometer for the U.S. economy. Coal won’t kill the railroads.
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