Stocks of major railroads have rallied over the past two months on hopes that an economic recovery might improve their business by yearend. But analysts and fund managers warn the rally may have gone too far and they're urging investors to get off the rails.
The run-up came just ahead of reports of first-quarter results. Burlington Northern Santa Fe (BNI) has gained 26% since early March, Canadian National Railway (CNI) is up 32%, CSX (CSX) has risen almost 37%, and Canadian Pacific Railway (CP) added 35%.
First-quarter reports showed few signs of an uptick, however, and railroad executives were mostly glum in their assessments for the rest of 2009. Burlington Northern CEO Matthew Rose said he couldn't promise much improvement after the company reported a 20% drop in first-quarter freight revenue from a year ago. "It's really difficult to talk about the back half of the year because when you have customers that are so focused on the here and now they are just not committing [to] any kind of an upturn at this point," Rose told analysts on the company's quarterly call. "So it makes it very, very difficult to look forward."
And freight trends have only gotten worse at the start of the second quarter, according to data compiled by the Association of American Railroads. U.S. rail traffic for the quarter so far is down 23% from the same period last year, with metals and auto freight both declining by more than 50%. Year-to-date, total U.S. rail traffic is off 17%.
seeing too much optimism
The dismal trends evident in first- and early second-quarter traffic figures as well as the cautionary talk from railroad execs put analysts on edge. Citigroup (C) railroad maven Matthew Troy downgraded Burlington Northern and Canadian Pacific to "sell" from "hold" and yanked the "buy" rating from Canadian National, calling his favorite in the industry fairly valued at current levels. And over the past few days, activist investor The Children's Investment Fund dumped almost all of its 18 million shares of CSX, according to an SEC filing.
With the market already pricing in a possibly tenuous recovery, Citigroup's Troy sees too much optimism. "Commentary and data from both railroads and shippers alike remain consistently of the view that little, if any, signs of a re-stocking lift or broader economic recovery-driven pick-up in volumes are emerging," Troy wrote in an Apr. 26 assessment of the sector. Historically, railroad shares have performed best from the period from about four months before the economy starts growing again through two months following, Troy noted.
The better play for investors may be among more-deeply out-of-favor stocks, such as rail-car maker FreightCar America (RAIL), down 50% over the past year. Former Goldman Sachs risk arbitageur and current star hedge fund manager Thomas F. Steyer of Farallon Capital Management has been buying shares of FreightCar lately and owned over 6% of the company as of Mar. 30, according to an SEC filing. Steyer didn't return a call for comment.
But FreightCar, trading at less than $19, has almost $11 a share in cash and virtually no debt. The company's results improved in the fourth quarter of 2008 after tanking earlier in the year. It reports first-quarter results on May 5.
Pressman is a correspondent in BusinessWeek's Boston bureau.