Railroads like Union Pacific Corporation (NYSE: UNP) and CSX Corporation (NYSE: CSX) have seen a sharp run-up this year despite rising fuel costs that have brought down the rest of the transportation sector. The catalyst behind the move is the soaring cost of commodities, which has increased demand and prices for rail services since 2007. In fact, the industry known for losing money even started to turn a profit during the past year.
Unlike airlines and trucking companies, railroads like CSX and Union Pacific have been able to successfully add on fuel surcharges to cover rising fuel costs while also managing to profit from the same phenomena. CSX, for example, recently reported a 46% jump in its profits that it attributed primarily to fuel surcharges and rising ethanol and grain volumes. This is the same ethanol that has jumped in price and led to higher gasoline costs.
Railroad stocks have dipped recently, however, due to concerns about the storms in Iowa. The majority of railroad transport is grain and food products out of the Midwest destined to other parts of the country. As a result, the lower production estimates in these states will also likely have an impact on railroads. Union Pacific, for example, recently cut its second-quarter estimates by five cents per share due to the weather conditions in Iowa alone.
Many analysts believe that investors have already compensated for the damages in the region. Union Pacific, for example, lowered its estimates five cents lower on its range of 90 cents to 98 cents per share. This means that the percentage drop in earnings due to the storms is only 5.5% at worst, according to company estimates. Shares of Union Pacific have already dropped some 6% off of their highs for the year, which more than compensates.
Moreover, many railroad companies have confirmed their full-year 2008 outlook despite the concerns about the storms in the Midwest. As a result, many analysts believe that railroads may be a buy right now after taking a small breather. However, there is a risk that the estimates provided by the railroad companies were artificially low and that more losses could be sustained. Unfortunately, that's a question that won't be answered fully until next years earnings conference call.
Union Pacific Corporation shares moved $0.64, or 0.91%, higher at the close last trading session.
CSX Corporation shares moved $0.30, or 0.53%, higher at the close last trading session.
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