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Containers Buoy Profit at Rails Grappling With Coal Slump

CSX Corp. (CSX) and Norfolk Southern Corp. (NSC), the two largest U.S. eastern railroads, topped analysts’ fourth-quarter profit estimates as gains in container cargoes helped counter sliding coal volumes.

Intermodal-container shipments, which can move via highway, ocean or rail, rose 2.8 percent at CSX and 3.2 percent at Norfolk Southern in the period, according to Association of American Railroads data. Coal slumped about 14 percent as utilities abandoned it for cheaper natural gas.

Yesterday’s earnings reports by CSX, Norfolk Southern and Kansas City Southern showed how the industry is adapting to declines in shipments of coal, which remains the biggest single product carried by the major railroads. Union Pacific Corp. (UNP), the biggest U.S. carrier, is set to report results tomorrow.

CSX and Norfolk Southern “put up good numbers in a very difficult environment, slightly better than expected,” said Peter Nesvold, a Jefferies Group Inc. analyst in New York. “These companies do a really good job redeploying assets in other parts of the network when things like coal are soft. It’s going to be difficult for them to grow earnings meaningfully until you start to see a rebound in coal.”

While the three companies all beat estimates, each posted profit declines from a year earlier. Norfolk Southern will face “continuing headwinds” from coal in 2013, Chief Marketing Officer Donald Seale said during a conference call.

Electricity Demand

“For utility business to rebound in terms of its volume and to help us grow that business back, we need electricity demand to pick back up, we need industrial load demand for electricity to improve, and we need gas prices to move up into above the $3.50 to the $4 range,” Seale said. For exports to increase, “the world economy needs to improve.”

Volumes have also been damped by the European economic slump, which is curtailing exports of metallurgical and steam coal.

Norfolk Southern has no plans to purchase new coal cars in 2013 and will instead “re-body” its existing fleet, Chief Executive Officer Charles “Wick” Moorman said on the call, using the industry term for rebuilding and refurbishing the units.

Sales tied to coal shipments dropped 23 percent in the fourth quarter to $657 million, the Norfolk, Virginia-based company said. Coal carloads fell 13 percent in the period, the railroad said.

Tax Rate

Norfolk Southern also benefited from a favorable tax rate in the fourth quarter, Jefferies’ Nesvold said in a telephone interview.

Coal volumes at CSX slumped about 19 percent in the period from a year earlier, the Jacksonville, Florida-based company said yesterday.

CSX rose 3.7 percent to $21.58 at 9:56 a.m. in New York. Norfolk Southern gained 2.2 percent to $68.40.

Shares of Kansas City Southern, the smallest of the major North American railroads, rose 0.9 percent to $92.50. The railroad rose to the highest since at least 1980 yesterday after reporting fourth-quarter revenue that beat analysts’ estimates on a 2 percent increase in carloads.

“Given the drought, the continued pressure on our utility coal franchise and the uncertainties prompted by fiscal cliff concerns, we’ll take those numbers any day of the week,” CEO David Starling said on a conference call.

Auto Shipments

Automotive-shipment revenue climbed 33 percent in the period, helping make up for a 19 percent plunge in the carrier’s utility coal business, Kansas City Southern (KSU) said. Container shipments climbed 4.6 percent, according to railroad association data.

Kansas City Southern, which transports goods from the Mexican port of Lazaro Cardenas to Laredo, Texas, on a line purchased from the Mexican government, is benefiting from new manufacturing plants south of the U.S. border.

“The company’s management is doing a fine job,” John Larkin, a Baltimore-based analyst at Stifel Financial Corp., wrote in a note yesterday. “The opportunities in Mexico, for the company, are immense over the long-term.”

Net income at the Kansas City, Missouri-based company of $92 million, or 83 cents a share, surpassed an average projection of 82 cents from analysts surveyed by Bloomberg.

CSX profit of $443 million, or 43 cents a share, also topped the 39-cent average projection from analysts. Norfolk Southern’s earnings of $413 million, or $1.30 a share, compared with a $1.19 estimate.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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