Good News From the Railroads


Is there a ray of sunshine poking out through the gray economic clouds for the class one railroads? It’s certainly looking like it. The downturn in commodities reversed a little and some railroads benefited from a small increase in coal and grain shipments. Cutting costs and decreasing operating ratios have helped significantly.

Union Pacific

Union Pacific posted better-than-expected Q4 profits. Company share prices, which have already increased 40% over this past year, increased another 4% to $108.25 after posting results.

Compared to 2015 carload volume decreased 3%. Coal revenues decreased 6% compared with 25% for the year. Industrial products slipped 2% compared with 12% for the year and intermodal volume was flat at $969 million compared with the previous yearly 9% slide. So we are not seeing any significant increase in any particular sector, just the slowing down of the rates of decrease – a gentle tap on the brakes.

“Higher energy prices, favorable agricultural markets and improving business and consumer confidence all support a return to positive volume growth this year,” Mr. Fritz, Union Pacific Chief Executive, said.

Union Pacific’s reported Q4 profit was $1.14 billion up from $1.11 billion a year earlier. Revenue decreased slightly by 1% to $5.17 billion.

Norfolk Southern

Norfolk Southern’s Q4 earnings also beat analyst estimates. The company posted a Q4 net income of $416 million up 18% from $361 million the previous year.

The earnings were delivered primarily from significant cost cutting and improvement in operating ratio. Revenue fell to $2.49 billion from $2.52 billion but expenses declined to $1.73 billion from $1.88 billion. The operating ratio improved 5% to 69.4% as a result. (Operating ratio measures operating expenses as a percentage of revenue).

The company expects continued improvement in operating ratios in 2017 by cutting a further $100 million in costs achieved in part by keeping a flat headcount.


CSX haven’t fared so well. Although they are trying to put a positive spin on it by touting a 9.2% topline increase from $2.78 billion to $3.04 billion. In fact net earnings are down to $458 million from $466 million a year earlier.

Coal shipments rose 8.3% and intermodal traffic increased 4%. CSX’s metals and equipment business declined 3.1%.

CSX have not been as successful at improving their operating ratio. Maybe this is one of the reasons Canadian Pacific’s ex-CEO Hunter Harrison is teaming up with Paul Hilal, previously of William Ackman’s Pershing Square capital management LP, to shake up CSX management, as reported in the Wall Street Journal.

“We are close to a deal to potentially look at some opportunities,” Mr. Harrison said in an interview.

It’s interesting to note that CSX shares dropped 3.2% on posting fourth quarter results but rose 11% to $41.06 on the Harrison and Hilal announcement.

Canadian Pacific

Hunter Harrison has left Canadian Pacific in good shape. They posted a fourth-quarter profit of C$384 million up from C$319 million a year earlier. Revenue fell to C$1.64 billion from C$1.69 billion which improved operating ratio that came in at 56.2% down from 59.8% in the same period last year.

According to the Wall Street Journal

Despite CP’s miss on its earnings and revenue expectations, the railroad continues to find ways to improve its operating ratio amid a slowdown in volume growth, said Dan Sherman, industrials analyst at Edward Jones. “With a pickup in the economy, things might get a lot better for CP in the next year,” Mr. Sherman said.

Canadian National

Canadian Pacific’s rival – Canadian National Railway Co. also reported increased earnings. The company posted C$1.02 billion profit compared to C$941 million in the same period last year. Revenue rose 2% to C$3.22 billion. Its operating ratio improved to 56.6% from 57.2%.

Carload volume increased 3% overall as grain shipments recovered from bad weather condition delays in the fall. Growing carload volumes were up 9%, intermodal down 1% and there were posted volume increases for automotive, metal and minerals carload volumes.

Kansas City Southern

Kansas City Southern have a set of unique challenges to deal with but are fighting hard. Company fourth-quarter profits of $129.6 million are down from $140 million and revenue was flat at $598.5 million.

Petroleum revenue declined 11% and their crude oil segment tumbled 67%. Sales linked to coal fell 9%.

The company operates a railroad between Mexico and the US. The ongoing friction between two countries has hindered KCS’s ability to perform. For example the Ford Motor Company scrapped plans to build their assembly plant along the KCS rail line in Mexico.

As reported in the Wall Street Journal

“There are still many questions about the future of Nafta, and the trade relationship between the U.S. and Mexico,” Chief Executive Patrick Ottensmeyer said Friday during a call with analysts. “While we’ve gotten some indication of the direction of the new administration through the nomination of most of the key trade policy makers, we still don’t have definitive answers to several of those questions.”

Indications of Recovery

In conclusion 2017 looks to be a positive year for the railroads. Stock valuations have increased since the new president’s election, with the exception of Kansas City Southern. The economy also appears to be moving in the right direction. It’s been a tough 2014- 2016 for the railroads and it’s a good sign for the logistics industry in general that the railroad sector is starting to show indications of recovery. (Please note that the BNSF results were not available at the time of writing and have not been included).

If you’re interested in learning how shipping by rail might better meet your freight transportation needs, or need warehousing to bring your goods closer to your customers, call New Mexico Transloading at 505 – 908 – 1911. We’d be delighted to have a conversation with you.

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