Rail Freight Gains as Record Retail Sales Buoy December Rush
North American railroads’ seasonal peak in shipments may be extending into December as an increase in online Christmas shopping boosts demand for moving packages.
Christmas shipping is shifting closer to the holiday after retailers delayed building inventory because of concern the economy would enter a recession, said Tony Hatch, an independent rail analyst in New York. Late restocking and railroads’ gains in reliability mean shippers may send more cargo by train this month, when volumes typically slow, he said.
“The general economic uncertainty has created a new kind of Christmas rush,” Hatch said. The delayed peak for carriers has “also been helped by the fact that the railroads are themselves getting better.”
Railroad intermodal units, the containers and trailers often used for retail goods that can move by rail, road and sea, rose 4.7 percent in the week ended Dec. 3, the Association of American Railroads said today. That growth rate may increase in coming weeks as shippers such as FedEx Corp. (FDX) and United Parcel Service Inc. (UPS) use railroads for delivery of online purchases.
FedEx, the operator of the world’s biggest cargo airline, announced this year that it would move some intermodal goods by rail for the first time. While the Memphis, Tennessee-based company moves less by railroad than UPS, the added business indicates that railroads are more capable of handling consumer deliveries.
Carriers including Union Pacific Corp. (UNP) and Berkshire Hathaway Inc.’s Burlington Northern Santa Fe LLC are benefiting as delivery companies such as FedEx and Atlanta-based UPS use railroads for long-distance transportation before putting their packages on trucks for final delivery directly to customers.
“The railroads move a lot of the deferred parcel business,” said Jason Seidl, a New York-based analyst with Dahlman Rose & Co. “With online sales up nearly 30 percent on the Black Friday weekend, you could see some additional rail traffic.” Seidl has “buy” ratings on Omaha, Nebraska-based Union Pacific, CSX Corp. (CSX) and Norfolk Southern Corp. (NSC), the biggest publicly traded U.S. railroads.
Thanksgiving weekend retail sales climbed 16 percent to a record $52.4 billion as U.S. consumers poured into the malls and took to the Web. Online sales on Black Friday surged 26 percent to $816 million and 18 percent to $479 million on Thanksgiving Day, according to ComScore, a Reston, Virginia-based research firm.
Since reaching a 2011 high in the week ended Oct. 1, intermodal carloads continued year-over-year gains. Those gains may increase in the first few weeks of December as peak’s end for the railroads extends for part of UPS’s and FedEx’s busiest seasons.
Delivery companies like UPS use railroads in part because “it’s just cheaper,” said Lee Klaskow, a Bloomberg Industries analyst in Skillman, New Jersey. “That being said, they’re not like a typical shipper looking at intermodal just because it’s cheap. If the service levels aren’t there, they’re not going to use it.”
A jump in carloads this December may not indicate increased business from holiday shoppers since the railroads don’t break out volumes by shipper, according to Paul Bingham, economics practice leader at consultant Wilbur Smith Associates in Arlington, Virginia.
“I wouldn’t be 100 percent confident that if I saw, let’s say the volume declines being less than you would expect seasonally typically, that was coming solely from UPS and FedEx,” he said in a telephone interview.
Though railroads could see some additional December volume, airfreight and truckers are likely to be the biggest beneficiaries of a delayed peak season, according to Justin Yagerman, a New York-based analyst at Deutsche Bank Securities Inc. He expects intermodal shipments to moderate through the end of the year and has a “buy” rating on FedEx, UPS, Union Pacific and Jacksonville, Florida-based CSX, and a “hold” on Norfolk Southern.
Railroad shares are outperforming the broader market as investors see a benefit from an increase in intermodal shipments. Before today, the Standard & Poor’s 500 Index (SPX) was little changed since the beginning of the year, while the S&P 500 gauge (S5RAIL) consisting of Union Pacific, CSX and Norfolk Southern rose about 10 percent.
Carriers in recent years have become more closely tied to cyclical consumer demand, according to Hatch. While that will benefit them if buying power is strong this holiday season, the extended shipping peak may not extend longer than usual if it fades.
“They’re much better companies but as they’re getting better they’re getting a lot more cyclical,” Hatch said. Rather than just moving grain and coal, for which demand is typically stable, “now they are going to move Christmas goods, or not, depending on the consumer.”
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