North American railroads bet on U.S. consumers for a lift

[July 14, 2015]   By Nick Carey and Allison Martell

CHICAGO/TORONTO (Reuters) - North American railroads are pinning their hopes for a second-half recovery on American shoppers as they prepare to release what analysts expect will be dreary second-quarter results.

No. 3 U.S. railroad CSX Corp kicks off earnings season for the railroads after the market closes Tuesday. Analysts are forecasting CSX will report 53 cents per share, unchanged from the second quarter of 2014. Earlier this year, CSX told investors it expected double-digit percentage earnings growth this year, then in April told shareholders to expect single-digit percentage growth.

"This is going to be a lousy earnings season for the railroads," said independent railroad analyst Anthony Hatch. "But there are some bright spots out there and in my opinion this is the bottom of the trough."

Analysts point to shipments of goods meant for shoppers, which are rising as shipments of coal, oil and grain are on the decline.

U.S. consumer spending rose 0.9 percent in May, the largest increase in nearly six years. The major railroads benefited from a 3.9 percent second-quarter increase in motor vehicles and equipment, and shipments of shipping containers containing consumer goods were up 4.6 percent.

"The question is whether the economy will aid in the recovery of the railroads," said Ken Hoexter, an analyst at BofA Merrill Lynch Global Research, "or whether those areas of support start to soften as well."

A steep drop in demand for coal is hurting U.S. and Canadian freight railroads.

CSX has reported coal shipments fell 14.7 percent during the second quarter. Coal shipments fell 15.6 percent during the just-ended quarter across all the major North American railroads.

Shipments of grain and crude oil also have faltered, pushing overall freight traffic at the major railroads down 1.7 percent in the last quarter, compared to relatively strong year ago results. Shares in No. 1 U.S. railroad Union Pacific Corp <UNP.N> are off more than 18 percent so far this year, while shares of No. 4 railroad Norfolk Southern Corp <NSC.N> are down 21 percent.

The same factors have led several analysts to predict that Canadian National Railway Co and Canadian Pacific Railway Ltd will cut earnings forecasts. CN had forecast "double-digit" growth in earnings per share for 2015. CP said it would aim to increase earnings per share by more than 25 percent in 2015.

(Editing by Joseph White and Chizu Nomiyama)

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