Thursday, September 17, 2015

All Aboard??? Is The Train (literally) About To Leave The Station???

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In the past, I’ve shown variations of the chart below of Norfolk Southern’s (NSC) stock price, noting the shellacking that the rail stocks have been taking this year, in most cases due to the dramatic decline in commodity prices in the energy sector, and especially with regard to lower demand for coal transport in the face of cheaper natural gas and oil.     To be a bit more concrete on the order of magnitude of the issue, take a look at the second chart below from the Association of American Railroads website ( ) showing the monthly volumes of carloads of coal that have been hauled by rails in the past few years, noting how dramatic the decline has been in 2015! 
Yesterday, to compound the issue for rail stocks, the US EIA (Energy Information Administration ) released a report stating that both coal demand and production are likely to continue to fall.  They noted:
Slower growth in world coal demand, lower international coal prices, and higher coal output in other coal-exporting countries have all led to a decline in U.S. coal exports. Lower mining costs, cheaper transportation costs, and favorable exchange rates will continue to provide an advantage to mines in other major coal-exporting countries compared with U.S. producers……EIA expects a 7% decrease in total coal consumption in 2015,… Lower domestic coal consumption and exports, combined with a slight increase in coal imports, are projected to contribute to an 86 MMst (9%) decline in production in 2015.

Going through the Association of American Railroads  list of other items hauled by rail, we do see some increase in rail traffic, for example in the auto sector, which thanks to the Fed’s NZIRP (Near Zero Interest Rate Policy) has been a strong economic sector.  (See third chart below).    We also see an increase in intermodal transportation (combination of containers and trailers on rail, ship, trucks, etc.).The question for rail stocks, or at least one big question, is just how much of other items’ hauling demands will be able to replace the business lost by the decline in coal traffic.  Housing and auto related sectors are already filling in some of the void, but with the Fed on the trigger to hike rates, there are concerns that both of these sectors might have already seen their peaks in terms of benefits from low-to-no-interest loans. 

Rails clearly have a ‘barrier to entry’ advantage which ought to have significant value in a world where goods must still be transported and where the internet cannot act as a disrupter by delivering tons of commodities to one’s doorstep!  So any increase in US economic growth in sectors requiring real goods, in contrast to services, ought to be good for rails.  And even if the US economy continues to plod along at current rates of growth, one has to wonder if the 30+% discounting in price (in some cases, even more!) is already pricing in the worst of the commodity rout into rail stock prices.

Again, each investor will have to opine for themselves….but it’s at least worth considering if the train is about to leave the station.

If you have any questions, or comments, please keep them coming in!!

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs and NSC.  Positions may change at any time without notice.   

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