Record Results & Good Visibility for Railroad Companies, But Nobody’s
Buying the Success
The railroad companies have confirmed that the industrial economy is on track for a solid second half. They are buying more equipment to deal with increasing load factors and most are planning to hire new workers to keep up with rising demand for their transportation services. This is a very good indicator for the future.
One of the big companies, CSX Corporation (NYSE/CSX), reported record second-quarter results with earnings coming in at $506 million, or $0.46 per share, compared to $414 million, or $0.36 per share, in the second quarter of 2010. This was a 28% gain in an environment of rising costs for raw materials. Company revenues grew 13% to $3.0 billion and management cited increased business activity in all major markets, including merchandise, intermodal and coal. Revenues were driven by volume growth and higher prices, which offset increased fuel prices.
If you read the earnings reports of all the major railroad companies (which I highly recommend), you’ll notice that they are all saying the same thing.China’s appetite for coal is a major contributor to business growth in rail transportation. Growth in utility demand at domestic power plants is lackluster, but sending coal to Asiais a new bulkhead business that’s keeping the industry solidly profitable.
Yet, for all the success that’s on the books, the stock market doesn’t seem to be celebrating the good earnings (and visibility). It’s as if the market is just plain grumpy and unsure of itself. The Dow Jones Transportation Average isn’t really saying anything with its recent performance. The Index is trading at the same level it was in April and May. It bounces around, of course, but there’s no technical trend that jumps out at you.
I suppose the stock market reflects the mood of the economy. Some parts are doing okay, while others struggle. Stock picking in this kind of environment is much more difficult, because there is no wind at your back. It is a very good sign that the railroad companies are saying that things are good and they are shipping more coal and chemicals. Following this specific industry is an excellent way to get a feel for the industrial economy and to develop your market view.
My feeling is that we’re going to be stuck in a period of mediocrity for several more years as the whole of the economy continues to balance itself out after a major period of excess and correction. The stock market should reflect this mediocrity and continue with its trendless price moves. This is why I like higher-dividend-paying blue-chips and some gold on the side for protection. Not much else is paying in this market.