Warren Buffett called his railroad purchase last year an "all-in wager on the economic future of the United States." He probably should have included China, too, reports the Wall Street Journal.
Trade volumes driven by emerging markets, and China in particular, have helped make this a pretty good year so far for rail activity. U.S. carload volumes are now just 11.2percent below their April 2008 peak, according to Avondale Partners. "Intermodal" shipments, when a container is moved by different modes of transport such as rail and ship, have done even better. They are off only 2.4percent from their peak, thanks to strong Asian trade volumes.
That is expected to bolster third-quarter results Tuesday from rail giant CSX Corp. It is the first of the major railway companies to release earnings and usually sets the tone for the sector.
Analysts expect CSX will report earnings of $1.04 a share, according to Thomson Reuters, up from 74 cents a year ago, and revenue of about $2.6 billion, up 16percent.
Over the past four years, when CSX has beaten expectations, the rest of the sector has followed suit about three out of four times, notes UBS analyst Rick Paterson.
Even if CSX doesn't beat by as wide a margin as in recent quarters, a miss doesn't look likely. The third quarter is traditionally strong for freight companies as businesses build inventories ahead of the holidays.
And this season, intermodal volume is shaping up to be as lofty as "Mount Everest", CSX Chief Financial Officer Oscar Muñoz quipped at an industry conference last month.
Still, the 22percent run-up in CSX shares since late August leaves it facing high expectations. To justify further gains, CSX will have to put in a strong showing. In its favor, the shares are still reasonably priced, trading at about 12 times estimated 2011 earnings, compared with a multiple of about 13 for Union Pacific Corp. and 15 for Kansas City Southern.
And it helps that domestic activity -- particularly coal, the largest business for CSX -- is picking up.
CSX also has managed to boost margins by wringing price rises from customers.
UBS's Mr. Paterson expects such improving domestic activity will help offset slowing export volumes next year.
If only the sluggish U.S. economy could deliver such a smooth hand-off.
(The preceding article was published by the Wall Street Journal.)
