NEW YORK — King Coal’s loss of a grip on the power industry this year is set to deal a blow to its footmen, the American railroads that transport the commodity around the country, reports a wire service.
Demand for coal is being hit by one of the warmest winters on record, which has exacerbated a decline in power prices, and by the decline of the coal-hungry U.S. steel industry.
That is likely to leave the railroads — who rely on coal for one-quarter of their freight — handicapped just at the time when they should be benefiting most from a recovery in the country’smanufacturing industry, some analysts warned.
Investors are only just beginning to sit up and take notice of the problem, analysts said. Although railroad stocks slipped on Thursday, they are still mostly close to 52-week highs.
“Railroad stocks at their current levels are priced for perfection – as though we have a strong economy, low oil prices, and no disruption of coal shipments,” said Jim Valentine, a Morgan Stanley transportation analyst, who argues that they are overvalued.
He said that the recent surge in the price of oil — which is a key cost in running trains — and a recent drop off in coal shipments, means the picture is less optimistic than the market has been indicating.
Analysts surveyed by Thomson Financial/First Call are expecting a strong first quarter for the railroads, but they are also predicting much weaker earnings growth in the second quarter.
Since a wave of consolidation in the 1990s, the railroad industry has been dominated by four companies, with two reigning over coal shipments from the west’s Powder River Basin region and two ruling the east’s Appalachian region.
The slowdown in expected earnings growth is most dramatic for the eastern railroads. Analysts predict earnings per share of 31 cents in the first quarter for CSX Corp. (NYSE:CSX – news), more than triple the 10 cents recorded in the year-earlier-period. But in the second quarter earnings are only expected to rise 22 percent to 62 cents from 51 cents in the same period in 2001.
They see earnings of 23 cents in the first quarter for Norfolk Southern Corp. (NYSE:NSC – news)., an increase of 44 percent from 16 cents in the year-earlier period, but the growth slows to 11 percent in the second quarter.
On the west coast, analysts peg earnings per share growth for No. 1 railroad Union Pacific Corp. (NYSE:UNP – news) at 17 percent for the first quarter and 13 percent for the second.
Burlington Northern Santa Fe Corp. (NYSE:BNI – news) is the exception to the pattern. Analysts see first quarter growth of 2 percent, rising to 6 percent in the second quarter.
A DARK OUTLOOK FOR COAL
It has been an especially tough year for coal producers so far. Warm weather, combined with low industrial demand and a resurgence in natural gas use, have led coal companies to cut production and lower their earnings forecasts.
“We’ve just had the mildest winter on record and there are higher-than-normal coal stockpiles at utility plants,” said UBS Warburg analyst Rick Paterson.
Lower production means fewer coal carloads to be hauled by the railroads. Coal transport volumes are already down 4 percent for the year, according to Tom White, spokesman at the Association of American Railroads.
“I think we’ll see some downward earnings revisions for railroads for the first half of 2002 based on badly declining demand for coal transportation,”Paterson said.
UBS Warburg lowered its estimates across the railroad sector on Feb. 18, and Paterson said his firm may lower them again.
Some analysts have recently been bullish about the rail companies because of the economic recovery. On March 6, Deutsche Banc Alex. Brown analyst John Barnes raised his price targets for most of the major railroads.
On Thursday, shares of the four major railroads were falling in early-afternoon trading. Union Pacific shares were down $1, or almost 2 percent, at $60.35, though they are still up nearly 18 percent from their price of $43.75 one year ago. Burlington Northern shares were down 89 cents, or almost 3 percent, at $29.97, close to their price of $28.42 a year ago.
CSX shares were down $1.48, or nearly 4 percent, at $37.11, but still up 26 percent from their price of $29.33 a year ago. Norfolk Southern shares were down $1.69, or almost 7 percent, at $23.16, though they are still up almost 53 percent from their price of $15.16 one year ago.