Tags: Auto | Sales | Union | Pacific

Surging Auto Sales Help Union Pacific, Norfolk Southern

Thursday, 10 May 2012 09:45 AM

Union Pacific Corp. and Norfolk Southern Corp. are piggybacking off a resurgence in U.S. auto sales that’s generating the most business for railroads in four years.

American rail shipments of motor vehicles and parts in the final week of March totaled 17,283 carloads, the highest since June 2008, data from the Association of American Railroads show. A 21 percent jump in April compared with the same month in 2011 trailed only a surge in shipments of petroleum, the group said.

Auto sales that averaged almost 14.5 million at an annual rate in the first four months of 2012 accounted for about 30 percent of the gain in Norfolk Southern’s first-quarter revenue and 14 percent of Union Pacific’s, based on company data. Strength in the motor-vehicle industry, which has helped fuel U.S. growth, extends from the Port of Charleston in South Carolina to the Mexican border at Laredo, Texas, benefiting truckers and railroad-equipment manufacturers in between.

“What’s good for autos is good for the economy,” said Peter Nesvold, an analyst in New York with Jefferies & Co. “Both supplies and finished products have to be moved. Capacity is fairly tight. If autos continue to improve, capacity will get tighter,” and the rates companies can charge for shipments “will start to get better.”

Omaha, Nebraska-based Union Pacific, the largest U.S. rail carrier, said automotive volume rose 15 percent in January- March, while CSX Corp., the biggest eastern railroad, had an 18 percent gain. Norfolk Southern saw a 23 percent increase. The Norfolk, Virginia-based carrier, the second-biggest in the eastern U.S., reported first-quarter revenue rose by $169 million; $49 million was auto-related.

‘A Lot of Scurrying’

“The movement of new cars to dealers has picked up tremendously,” said Charles Clowdis, managing director of transportation-advisory services at IHS Global Insight in Lexington, Massachusetts. “There is a lot of scurrying going on to be able to handle the demand. Railroads are seeing the same thing as the specialized-car haulers.”

Nesvold has a “buy” rating on Jacksonville, Florida-based CSX, Union Pacific and Ryder System Inc. in Miami, which manages supply shipments for automotive and other industries. Motor- vehicle exposure isn’t the main reason for his recommendations: The rail companies have been able to boost revenue consistently and raise prices in recent years, partly because there are barriers to entry for competitors, he said.

Railroads Outperforming

That’s reflected in the Standard & Poor’s Supercomposite Railroads Index -- comprised of Union Pacific, CSX, Norfolk Southern and Kansas City Southern -- which has risen 29 percent since September 2011, compared with a 21 percent gain for the S&P 500 Index.

Vehicles are “an important support to the transport sector,” said Sophia Koropeckyj, managing director at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Since 2009, motor-vehicle and parts production has doubled and is now nearly back to where it was in 2007.” The 18-month recession began in December of that year.

Auto production has a greater multiplier effect than most other industries on transportation and the rest of the economy, said Chad Moutray, chief economist at the National Association of Manufacturers in Washington. For each dollar spent, an additional $2.02 of output is generated, so “undoubtedly, the growth in the motor-vehicle sector is having spillover effects,” he said.

Alan Krueger, chairman of the White House Council of Economic Advisers, noted the ripple effect when he called for fiscal policies aimed at bolstering U.S. factory jobs.

‘Above its Weight’

“Manufacturing punches above its weight,” Krueger said in an April 26 speech at Columbia University in New York. Factories tend to group together geographically and create “significant spillovers within local industrial clusters,” he said.

Auto suppliers have benefited from this year’s strength as well. The outlook for steel is, “given the automotive production, pretty bullish,” CSX Chief Executive Officer Michael Ward said in an interview April 18.

Chief Marketing Officer Donald Seale of Norfolk Southern agreed with that assessment. “Our outlook for our steel and automotive businesses remains positive,” he said on an April 24 conference call. “We have an automotive market that’s extremely good and the steel market is following that. So we see good opportunity.”

Canceled Shutdown

Chrysler Group LLC said May 2 that four of its North American plants will skip normally scheduled two-week midyear shutdowns to meet increased demand. Two more plants will close for one week rather than two, according to the Auburn Hills, Michigan-based company.

General Motors Co., the world’s top seller of cars and light trucks, boosted its forecast on May 1 for full-year U.S light-vehicle sales to as much as 14.5 million from 14 million. The Detroit-based company cited better-than-expected industry sales in the first quarter and forecasts that the U.S. economy will keep growing.

Gross domestic product will expand 2.3 percent this year, according to the median estimate of 75 economists surveyed by Bloomberg News from April 6 to April 11. The world’s largest economy grew 1.7 percent last year. First-quarter auto purchases were the strongest in four years, and the pace picked up in April to a 14.38 million annual rate from 14.32 million a month earlier, Ward’s Automotive Group data showed.

‘Nice Boost’

It was “a nice boost for us,” Jack Koraleski, president and chief executive officer at Union Pacific, said in an April 19 telephone interview. “And if that continues through the year, that should give us some opportunity to help offset some of the softness we see in coal.” Cheaper natural gas has prompted some companies and utilities to make the switch from coal, resulting in fewer shipments of hopper rail cars designed to carry bulk commodities.

Sustained consumer spending for automobiles will depend on additions to employment and higher wages. While payrolls climbed by 115,000 workers in April, the increase was the smallest in six months, according to Labor Department data released last week. Average hourly earnings, at $23.38, were little changed from March, the jobs report showed.

“At least a portion of strength in vehicle sales could be attributed to fleet replacement,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “Underlying consumer demand has come back more modestly, which has some multiplier effects for the broader economy but must continue to help.”

Transcending Borders

The auto industry’s rebound is transcending borders. Manufacturing in Mexico is projected to rise more than 40 percent by 2015, and that also will benefit U.S. transportation companies, David Starling, Kansas City Southern’s president and chief executive officer, said on an April 24 conference call. KCS runs operations across the U.S.-Mexico border and is profiting from a pickup in two-way trade, crossing the Rio Grande in the Texas towns of Laredo and Brownsville.

“Auto production has a ripple effect, as new plants provide an opportunity for KCS to move raw material and auto parts into Mexico and then finished vehicles for the local markets, U.S. and Canada, as well as exports” throughout the region, he said.

Container volume in the Port of Charleston rose 12 percent in March, the strongest month for containerized traffic at the port since October 2008. Bayerische Motoren Werke AG’s exports of BMW vehicles and other similar cargo handled at Charleston’s Columbus Street Terminal had their best month since March 2008, according to the Port of Charleston’s website. The company makes vehicles in Spartanburg, South Carolina.

Rail-car makers are getting a boost, too. Greenbrier Cos. will start producing a new vehicle carrier in the fourth quarter with small changes from the one it replaces.

“The automotive market is really hot right now,” William Furman, the Lake Oswego, Oregon, company’s president and chief executive officer said in an April 9 conference call.

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