US Railroads Well Positioned for Upturn, Moody’s says
Railroads should pick up market share from trucking companies as economy improves.
Moody’s appears to concur with major investor Warren Buffett’s long-term view of the US railroad industry (or is it the other way around?). On the heels of further reducing Berkshire Hathaway’s (BRK.A) holdings in the ratings agency, Buffet is making a huge bet on the railroad industry through Berkshire’s acquisition of Burlington Northern (BNI).
In its timely annual Industry Outlook, Moody’s says that “While the worst appears to be over for the railroad sector, it will be a long road back to the industry’s peak activity levels. Thus, the stable outlook for the North American railroad industry anticipates a slow recovery of depressed freight volumes during the next couple of years.”
“There is unlikely to be a meaningful upswing in demand until employment levels rebound, housing stabilizes and capital investment picks up,” said Moody’s Vice President-Senior Credit Officer David Berge.
Overall, railroad freight volumes are expected to recover slowly from their cyclical trough, with carloads up 5% to 8% in 2010 and 10% in 2011, the report said.
The railroads are poised to pick up market share from truckers in an upturn because they have continued to spend significant amounts on infrastructure investments while trucking companies have slashed capital spending to cope with reduced volumes.
In the process, railroad operations have become more nimble and cost-efficient. When an upturn takes hold, they should be able to bring excess capacity to bear quickly. Trucking companies have not been investing in equipment, systems and training, and therefore will be less able to respond to increased demand.
Although there has been an improvement in industrial categories such as metals and chemicals, demand associated with consumer goods, housing and automobiles is likely to remain weak. In addition, coal shipments, which are highly profitable for railroads, will be hampered in the near term by high inventories at electric utilities.
“Railroad freight volume is a leading indicator of economic activity, as volumes tend to reflect positive trends in the re-stocking of inventories and feedstocks that precede growth in industrial output,” Berge said.
According to the report, railroads’ pricing power should hold up due to service improvements and repricing of unfavorable legacy contracts despite pressure on demand.
The industry has the capacity to handle an unexpectedly strong increase in demand, said Berge, which is an operating condition that has not always been characteristic of this industry in periods of demand recovery. “Since demand is only expected to recover at a moderate pace, network congestion is unlikely to be a major concern over the next few years.”
For details see North American Railroads Poised for Slow Recovery.
For latest analyst comments on Burlington Northern see Alacra Street Pulse.
For a transcript of the conference call on the deal, click here.
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