Railroad stocks are always good barometers on overall business conditions and the economy. Keeping up with railroads is equally as useful as following the Dow Jones Transportation Average for stock market direction. And for the most part, the major railroad companies have been excellent investments over the last few years, with oil, intermodal, and agriculture shipments handily making up for modest weakness in coal freight.
This earnings season, railroads are offering investors some comfort.
CSX Reporting Decent Growth
First to report its earnings was CSX Corporation (CSX), which has 21,000 miles of track in the Eastern U.S. and Canada. The company produced a record 2014 fourth quarter and fiscal year in terms of sales, operating income, bottom-line earnings, and earnings per share.
According to the company, fourth-quarter sales grew five percent comparatively to $3.2 billion, with noted strength in merchandise, intermodal, and coal shipments. Net earnings leapt 15% higher on a comparative basis to $496 million, while earnings per share improved 17% to $0.49 per share—both are new records for the company.
For this year, management expects solid margin expansion and double-digit growth in earnings per share over 2014.
In terms of volume in the most recent quarter, CSX’s biggest gain was in chemical shipments including oil, LPG, and fracturing sand, growing 13% over the fourth quarter of 2013. This was followed by mineral (13%), coal (11%), metal (5%), and intermodal shipments (5%).
The company’s total locomotive fuel expenses dropped a whopping 45% comparatively in the fourth quarter of 2014 to $335 million, with the average price of diesel fuel falling by $0.49 a gallon.
All in all, it was a very good quarter for CSX. The stock’s been in consolidation, hitting several points below its record-high since October of last year. (See “Union Pacific, Transportation Stocks Cashing In on Lower Oil Prices Heading into 2015.”) But CSX isn’t alone. Just like the broader stock market, railroad stocks have mostly all been in a price consolidation over the last several months.
One of my top stocks to watch within the group is Union Pacific Corporation (UNP). The company reports next Thursday.
Across the board, Wall Street earnings estimates for the company’s fourth quarter and full year 2014 have been moving higher. For the year, Union Pacific should get close to a double-digit gain in total sales, with earnings expected to grow by the high double-digits comparatively.
These are pretty strong expectations for a mature, old economy industry. With this in mind, railroad stocks have already gone up tremendously in anticipation of solid business conditions.
With the broader stock market unsure of itself with weak economic data and unstable oil prices, railroad stocks offer comfort in terms of the industrial backbone of the economy.
This market could very well return nothing this year on the back of two strong years of breakout capital gains…which is why dividend income remains a very important component of expected total returns from equities.
With CSX expecting solid margin expansion in 2015, this should also be the case with most of the other railroads. Increased dividend income from these stocks is likely this year.