ANALYSTS CUT OUTLOOK ON NORTH AMERICAN RAILROADS
NEW YORK -- Wall Street Wednesday cut earnings forecasts for the ailing railroad sector, a day after a profit warning by Norfolk Southern Corp. confirmed concerns about high fuel costs and slowing industrial output, reports a wire service.
J.P. Morgan slashed its estimates on the big four U.S. railroads, citing declining production of vehicles, chemicals, metals and forest products, which make up a large chunk of the goods transported by railroads.
Also, an analyst with Deutsche Bank Alex Brown said he expects investor expectations for the sector to slide in coming weeks. And Morgan Stanley cut its estimates on Norfolk Southern, the No. 4 U.S. rail company, and said earnings estimates for railroads would likely need to come down.
"The rails carry everything. They're the economy on rails," said J.P. Morgan analyst Jill Evans.
A surge in energy prices is also crippling bottom lines of Norfolk Southern and the other major U.S. railroads: Burlington Northern Santa Fe Corp., Union Pacific Corp. and CSX Corp.. Norfolk Southern gained 1/16 to $13-1/2 on Wednesday, but the three other majors lost ground. Burlington Northern fell 3/8 to $25-13/16, Union Pacific declined 1-1/2 to $47-7/8 and CSX lost 11/16 to $24.
The amount spent by the railroads on fuel for every dollar of revenue generated has risen 50 percent since 1999, according to a report by UBS Warburg.
The only silver lining this quarter, Evans said, was coal, the largest single item that railroads transport. Chilly weather in the east has kept train cars full of the black substance, she said.
Not all railroads are being equally hurt by the upturn in energy prices, analysts said.
Canadian National Railway Co. and Burlington Northern hedged their bets against rising costs by locking in energy prices early, while others, such as Norfolk Southern and CSX have not, said Michael Lloyd, an analyst with DB Alex Brown.
Railroads have pushed through several price increases for their customers in the past three months because of higher fuel costs, Lloyd said, but higher fees can result in business going to trucking companies.
Lloyd also said the sector has a fundamental problem cutting costs quickly in response to lower shipment volume.
Trucking companies, the railroads' major competitor, can save money quickly by taking trucks off the roads and putting them in parking lots, he said.
Even if railroads reduce the number of cars they run in a train, staff and locomotive costs keep the savings to a minimum.
J.P. Morgan cut its fourth quarter earnings forecast for industry leader Union Pacific, which had 26.5 percent of the market share in 1998 according to the UBS report, to 90 cents per share from $1.00, and year 2001 estimates to $4.40 from $4.55.
Burlington Northern, the No. 2 railroad, was cut to 63 cents per share from 67 cents in the fourth quarter, and $2.70 per share from $2.80 in 2001. CSX was cut to 30 cents from 40 cents in the fourth quarter.
Forecasts for Canadian National, the largest Canadian railroad to operate in the U.S., were also cut by J.P. Morgan, but by a relatively lower magnitude.
Market share gains, successful competition against truckers, and significant hedging against high energy prices have kept the railroad competitive and on a good track, Evans said.
J.P. Morgan said it expects Canadian National to post fourth quarter
earnings of 80 cents, from previous estimates of 82 cents.
December 21, 2000
© 2000 Brotherhood of Locomotive Engineers