Railroads Couple More Cars as Housing Boost Shipments

Union Pacific Corp. (UNP) is pulling rail cars from storage for the first time in four years to haul lumber for homebuilders, a welcome source of strength for an industry that’s bucking the effects of a slowing economy.

North American rail carloads of lumber and wood products this year through July 28 were 10 percent higher than the same period in 2011, according to the Association of American Railroads. That compares with a 1.4 percent drop in total carloads.

Union Pacific, Canadian National Railway Co. (CNR) and CSX Corp. (CSX) are among companies benefiting from new-home construction, which climbed in June to the highest in almost four years. Sustained gains in sales of cars and trucks, which are transported --along with parts -- by rail, and the ability to raise prices also provide a boost for railroads, rewarding shareholders.

“The expectation is for continued growth in construction- related activity, whether it’s lumber or aggregates, to help support rail volumes in 2013 and beyond,” said Ben Hartford, an analyst in Milwaukee at Robert W. Baird & Co., who has an “outperform” rating on Omaha, Nebraska-based Union Pacific and CSX, in Jacksonville, Florida. The outlook “is favorable for the foreseeable future.”

Photographer: Ken James/Bloomberg

The Union Pacific J.R. Davis Yard in Roseville, California. Close

The Union Pacific J.R. Davis Yard in Roseville, California.

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Photographer: Ken James/Bloomberg

The Union Pacific J.R. Davis Yard in Roseville, California.

Shares have outperformed the market since the end of March, with the Standard & Poor’s Supercomposite Railroads Index (S15RAIL) gaining 12 percent, compared with a 0.5 percent drop in the broader S&P 500. Among analysts, 19 of 26 have “buy” recommendations on Union Pacific, the biggest North American railroad.

Four-Year High

The number of rail cars that moved lumber over U.S. tracks in the week ended April 27 reached an almost four-year high, according to figures from the Washington-based railroad association. Lumber shipments this year have been outpaced only by a 40 percent surge in petroleum products, which may reflect the pickup in domestic energy production, and a 22 percent gain in deliveries of motor vehicles and equipment.

Cars and light-duty trucks sold at a 14.1 million annual rate in July after a 14.3 million pace a month earlier, according to data from Ward’s Automotive Group. The industry is on track for a third consecutive year of at least 10 percent gains, the first such streak since 1973.

Railroads also have succeeded in raising prices at a faster pace than rail inflation, a gauge of U.S. industry costs such as wages and employees’ health care, according to Jeffrey Wichmann, an analyst at CreditSights Inc. in New York.

“The beauty of the rails is that despite this low growth for volumes, pricing growth is likely to remain healthy,” said Wichmann. “That’s going to support revenue growth.”

Core Pricing

Union Pacific increased its so-called core pricing, which excludes the effect of fuel surcharges, 4.5 percent in the second quarter, contributing to a 6 percent rise in average revenue per car, Eric Butler, executive vice president of marketing and sales, said on a July 19 conference call. U.S. consumer prices excluding energy and food climbed 2.2 percent in June from a year earlier.

Some of Union Pacific’s bright spots may be at risk because government spending cuts and tax increases that are due to expire at year-end may discourage U.S. consumers, Jack Koraleski, the company’s president and chief executive officer, said in a July 19 interview with Adam Johnson on Bloomberg Television’s “Street Smart.”

Slowing global growth, coupled with the European debt crisis, also make the company “pretty cautious,” given that 40 percent of its business starts or ends in a country abroad, he added.

Big Impact

“You watch everything that’s happening in the euro zone,” he said. “You see the talk about the Chinese economy slowing down a bit. And those things have a big impact.”

Even so, he’s encouraged by the rebound in lumber shipments.

“When you look at the fact that we are pulling center-beam flatcars out of storage to haul lumber for the first time since 2008, that’s a fundamental for the economy and that bodes well,” Koraleski said.

Union Pacific posted second-quarter profit July 19 that topped analysts’ estimates, causing its stock to rise the most in four months. Net income advanced 28 percent to $1 billion for the first time, or $2.10 a share, from $785 million, or $1.59, a year earlier, the company said in a statement. The average of 26 estimates compiled by Bloomberg was $1.97 a share.

Biggest Takeover

Warren Buffett’s Burlington Northern Santa Fe hauled 10.7 percent more lumber and wood products in the first half of this year than a year earlier. Buffett’s Berkshire Hathaway Inc. (BRK/A) spent $26.5 billion in 2010 to acquire the remaining 77.5 percent of Fort Worth, Texas-based BNSF in the billionaire investor’s biggest takeover.

The housing-market trend that’s boosted Norfolk Southern Corp. (NSC)’s lumber business by 6 percent is “encouraging,” Donald Seale, chief marketing officer of the Norfolk, Virginia, company, said July 24 on a conference call with analysts. Clarence Gooden, CSX executive vice president for sales and marketing, projected a “continued recovery” in building materials on a July 18 earnings call.

Record-low mortgage rates are generating buyer interest again, and that’s encouraging builders to break ground on an increasing number of homes. Housing starts rose 6.9 percent to a 760,000 annual pace in June, marking the highest level in almost four years, the Commerce Department reported July 18.

Faster Pace

Because shipments of lumber by rail have been growing at a faster pace than new construction in the past few months, builders may be stockpiling material in preparation for even more construction, said Paul Diggle, a property economist at London-based Capital Economics Ltd. Builder confidence last month was the highest since 2007, according to a National Association of Home Builders/Wells Fargo index.

New-home construction still is well below the 2.1 million pace seen in 2005 at the height of the housing bubble, when twice as much lumber was hauled than is being shipped today.

The “numbers would tell you we’d have some 700,000-plus homes built this year,” Federal Reserve Bank of Dallas President Richard Fisher told reporters on June 28. “It’s a slow process, but I do think the housing market has bottomed out.”

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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