Class I railroads expected to report strong earnings growth for second quarter

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Railroads are likely to report stellar financial results for the second quarter as traffic and freight rates continue to rise.

CSX Transportation will kick off two weeks of Class I railroad earnings reports and conference calls with Wall Street analysts when it releases quarterly results on July 17. It will be followed by Canadian Pacific on July 18, Union Pacific on July 19, Kansas City Southern on July 20, Canadian National on July 24, and Norfolk Southern on July 25.

Wall Street analysts were expecting the Class I railroads’ earnings per share to rise by 23 percent, on average, for the quarter, according to a Trains News Wire review of consensus estimates for each of the six publicly traded systems. Only CN is expected to have single-digit earnings per share growth.

The quarterly results come amid surging volumes and tight trucking capacity that has helped railroads raise rates.

But CN, Norfolk Southern, and Union Pacific are still struggling with service issues that began last year for a variety of reasons, which analysts suspect may have limited railroads’ traffic gains.

On CN, it’s a capacity crunch caused by volume growth that was much stronger than expected across western Canada. NS remains congested across the South, particularly in Alabama, Georgia, and Tennessee. UP is short of crews in many locations, and traffic remains heavy in its predominantly single-track Gulf Coast region.

All three railroads are likely to face questions on when their key performance metrics, including average train velocity and terminal dwell, are expected to improve.

Of the three, only CN has set a timeline for restoring service to normal levels. CN says service should return to normal early in the fourth quarter, once all track capacity improvements have been made in western Canada and it has all of the crews and locomotives it needs to handle heavy volumes.

With most of the Class I railroads running more slowly than last year — with the notable exception of CSX — there have been questions about to what extent the industry has blown an opportunity to gain market share from trucks.

“I think it is clear that the service issues carriers are experiencing are limiting their ability to grow volumes and take market share from truck,” says Todd Tranausky, a railroad analyst with FTR Transportation Intelligence. “I think the clearest example is really on the intermodal side of the house. Domestic container growth could be substantially higher than the 5 to 6 percent range it has been range-bound in for the last year.”

Carload traffic has been a mixed bag.

“Economically-sensitive freight, which excludes intermodal, coal, grain and petroleum, is up rather strongly compared with its five-year average,” Tranausky notes.

Pulp and paper mills that churn out brown paper and cardboard boxes are running all out to keep up with demand from electronic retailers, such as Amazon. Yet railroads’ pulp and paper traffic is flat compared to last year and is well below the five-year average, Tranausky says.

“So those shippers are clearly sticking with truck,” he says.

Truck utilization is currently running at 100 percent and is expected to remain there for the rest of the year, Tranausky says, which should bode well for continued volume gains for railroads.

The Class I executives also are likely to face questions about the potential impact of a trade war as the U.S. and its trading partners in Asia, Europe, and North America impose tariffs.

Some 42 percent of rail traffic and 35 percent of rail revenue is tied to trade, according to the Association of American Railroads.

BNSF Railway, which as a part of Berkshire Hathaway is not publicly traded, is expected to release its quarterly results alongside its corporate parent on Aug. 3.

NEWSWIRETrains News Wire

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