As we prepare to bid adieu to 2015 and step into a new year, a pertinent question bothering investors interested in the railroad space is whether 2016 will be any better for the beleaguered industry than the year that is about to end. From what has passed, railroad stocks have had a harrowing experience in 2015, hit by the persistent weakness in domestic coal shipments.
Since coal is a key revenue-generating commodity for railroad operators, it is only natural that the decline in domestic coal shipments has hurt stocks in the space big time. Soft commodity prices apart, strength of the U.S. dollar has also negatively impacted railroad results. The struggle faced by the railroad operators is evident from the 31.58% year-to-date decline witnessed in the Dow Jones U.S. Railroads Index.
Lackluster Quarterly Results in 2015
The abovementioned headwinds resulted in major railroad operators delivering below-par quarterly results this year. The dullness started from the first quarter itself resulting in the Dow Jones U.S. Railroads Index declining 8.59%. The performance was no better in the second quarter where the Dow Jones U.S. Railroads Index shed 10.73%.
Headwinds related to coal were primarily responsible for the below-par performances of railroad operators in the third quarter of 2015 as well. Moreover, adverse foreign currency movements characterized by the strength of the U.S. dollar, lower fuel surcharges received from customers due to declining fuel costs and slow carload growth from the energy sector wreaked havoc for railroad stocks. The Dow Jones U.S. Railroads Index lost 10.26% in the Jul 1 – Sep 30 period.
Q4 Forecast No Better
To make things worse, there seems no respite for railroads as coal weakness is likely to hurt stocks in the final quarter of 2015 too. This is evident from the disappointing outlooks issued by Kansas City, MO-based Kansas City Southern (KSU – Analyst Report) and Jacksonville, FL-based CSX Corp. (CSX – Analyst Report) at the Credit Suisse industrial conference in Florida earlier this month.
Frank Lonegro, the Chief Financial Officer of CSX Corp. stated that the decline in domestic coal shipments has been steeper than expected in the fourth quarter, results of which will be revealed by the company on Jan 12. The uncertainty prevailing in the energy markets has contributed to the current prevailing sorry state of affairs at the railroad operator.