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The U.S. transportation networks are often compared to the human “circulatory system”. Just as blood carries life-giving, oxygenated cells to all parts of the body, trains and trucks moving along briskly—and carrying loads of freight—indicate that the economy is healthy.
With the economy on the mend, trucking companies and railroads have been enjoying good times. The euphoria may be short lived, however, at least for trucking firms.
But the same can’t be said for Arkansas Best Corporation (Nasdaq: ABFS), which just posted earnings that were below analysts’ estimates. It’s still struggling to show a profit, and with high fuel prices possibly going even higher, it’s unlikely that will happen anytime soon.
Most truckers have been enjoying higher freight volumes and higher profits, as the U.S. manufacturing sector has charged upward for 20 consecutive months, according to The New York Times. That could all quickly come to a crashing halt, says Donald A. Normal, an economist for Manufacturers Alliance.
“The manufacturing sector is [always] hit disproportionately hard by higher diesel prices. Simply to move all this stuff around, it is really hard to affect any cost savings. You have little in the way of alternatives.”
When the Middle East erupted in protests a few months ago, fear over oil supply disruptions sent oil prices to their highest levels since 2008. They’re still there. The longer they remain at these lofty levels, the longer they’ll impact trucking firms’ earnings.
You see, the reality has once again set in for trucking firms. Even with the institution of fuel surcharges, they have trouble raising prices fast enough, and customers who have a choice are beginning to switch their loads over to railroads.
Railroad Stocks Are Riding High
Why are railroads starting to eat the truckers’ earnings lunches? Simple: The fuel cost per ton of freight per mile is far superior to that of trucks. The average intermodal can haul the equivalent of 300 tractor-trailer trucks.
According to studies done by the Federal Railway Administration, the average rail fuel efficiency is anywhere between 156 and 512 ton-miles per gallon of diesel. On the other hand, the average truck fuel efficiency is 68 to 133 ton-miles per gallon.
Put another way, trains are anywhere from 1.9 to 5.5 times more fuel efficient than trucks. No wonder companies that have rail access are making the switch.
That’s why Norfolk Southern Corporation (NYSE: NSC) just hit one out of the park. It reported quarterly revenues that beat Wall Street estimates. Shipments of autos, coal and other freight have been steadily increasing as the economic recovery slowly winds up.
Norfolk CEO Wick Moorman was upbeat about the results: “Norfolk Southern delivered an excellent financial performance during the quarter, reflecting the strong market for freight rail transportation and the value of our service product. We see continuing opportunities for growth in almost every segment of our business, and we’re optimistic about our prospects for the balance of 2011.”
CSX Corporation (NYSE: CSX) also announced solid results, with revenue for the most recent quarter up 13 percent from a year ago. It also expects solid volume growth throughout the remainder of 2011, and thinks it will be able to boost prices faster than inflation, something truckers have a hard time keeping up with.
As a testament to the growth CSX is experiencing, it brought 180 locomotives out of storage, most of which were mothballed during the recession a few years ago.
With global demand for coal booming, all the railroads are hauling record amounts of it to export terminals on both coasts. With Germany deciding to shutter about 40 percent of its nuclear generating capacity for an indeterminate period of time, it has to make up that generation capacity utilizing fossil-fuel plants, and some of that will be via coal-fired units.
Pumping More Oil is Just a Band-Aid
This week, Obama once again pleaded with OPEC to start pumping more oil to ease prices. Fat chance. Why on earth would they, when they’re holding many of the cards?
With diesel prices remaining well north of $4.00 a gallon and possibly reaching $5.00 a gallon before summer’s end, the railroads will continue to win business from truckers. It’s one of the many reasons you should have a rail stock or two in your portfolio for the balance of 2011.
It’s all upside with diesel at nosebleed levels.
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