“The long-term outlook for rails is bullish and may arguably have improved with rising oil prices given railroads relative fuel advantage over truck,” observes William Greene, Morgan Stanley Research.
“While we now see a 1.0% to 2.0% decline for US rail volumes for 2008, this is still far better than the 2.8% decline in 2007,” continues Greene. US railroads posted 5% to 23% growth in earnings per share (EPS) in 2007 (except Burlington Northern) despite the volume declines and numerous fuel headwinds, which speaks to the power of the rail pricing story, he added. “We see no signs the pricing story is ending.”
“Given continued pressures on the US economy and a more bearish GDP forecast from our economics team, we're lowering our railroad volume estimates for the second half of 2008 and 2009. We now expect US rail volumes to fall another 1.5% in the second half (roughly 1% less growth than our previous forecast) with weakness persisting into the first half of 2009. Our 2009 volume forecast calls for only 80 basis points (bps) US carload growth in 2009. We're also tweaking our 2Q08 estimates for fuel and volume trends.”
