Coal isn't dead yet and the railroads are loving it

pulse

March 16, 2017 11:06 AM

Coal prices are up and it is benefitting the rail roads.

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By January 2016, some investors believed that the final nail had been hammered into the coffin of the American coal industry, but then something surprising happened.

In a recent note, UBS reported the decline in coal's importance to railroads when production was lower:

"In 2011, coal made up ~31% of revenue for CSX corp. and NSC (Norfolk Southern) and ~21% of revenue for UNP (Union Pacific). As shown in Figure 1, below, coal fell to ~12% of revenue for UNP, ~17% of revenue for CSX, and ~15% of revenue for NSC in 2016."

But now, with coal making a comeback, as well as other economic developments, UBS is more optimistic about rail:

"We have a broadly positive view on the railroad stocks based on our expectation of favorable cyclical improvement in rail volumes in 2017, stronger pricing in 2018, and the potential for boosts to EPS and free cash flow if US tax reform is enacted."

The bank's favorite rail stocks are CSX and NSC, in part because of their exposure to coal.

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