Tuesday, July 07, 2009

Analyst reduces rail estimates, advises caution

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Because the decline in railroad traffic accelerated in the second quarter, Citi Investment Research analyst Matthew Troy has reduced railroad earnings estimates for the period by an average of 16%. Only Norfolk Southern retains a "buy" rating.

In a 23-page analysis to investors July 6, Troy said the revised outlook "reflects lingering volume weakness with no meaningful sequential improvement evident through June. Specifically, after falling 16% in 1Q, rail freight volumes fell a steeper 21% in 2Q, with little easing in recent weeks despite the benefit of easier flood-related comparisons in the year-ago period."

Troy also said: "Despite our appreciation for the early cycle nature of rail stocks, which historically outperform 4-6 months prior to an economic trough, we remain cautious here. Specifically, with the market already well versed in the group's early cycle virtues, we see risk of further estimate reductions and investor disappointment later in '09.

"Sequential deterioration in June Chinese port data (off 18-20% vs. May down 12-15%) undermines intermodal volumes into August, while coal traffic remains structurally challenged given stockpile build (up ~1.5-2X), lower U.S. electricity production (down 5% in 2Q) & cooler East Coast temperatures (down 2-4%). We think focusing on 'normal' historical stock performance patterns in a market dislocation that is anything but normal doesn't adequately discount the risk of a protracted recovery or 'L' shaped stagnation. While we continue to keep Hold rated UNP, CSX & CNI in the portfolio, today NSC is our only Buy rated rail," Troy said.