Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Rail Stocks Have Absorbed Higher Fuel Costs, So Why Not Trucking? Air?

By

The answer lies in the types of cargo transported, the distances involved, and the high barriers to competition.

PrintPRINT
To paraphrase H.L. Mencken's remark, "For every complex problem, there is a solution that is simple, neat, and wrong," for every apparently straightforward market relationship, exceptions abound. I will go so far as to say that in three decades of market analysis, everything interesting to me has involved exceptions to and not confirmations of rules.

Let's take the relationship between transportation stocks and fuel prices. What, really, can be simpler? You take plane, train, or truck, put stuff into it, fill the fuel tank, and head off to your destination -- unless, of course, you are Boeing (NYSE:BA) and have one of those spontaneously combusting lithium ion batteries. The fundamental transportation equation has changed little since the first cave-dwelling ancestor of the UPS (NYSE:UPS) or FedEx (NYSE:FDX) deliveryman or deliverywoman went about their rounds.

However, if we map the relative performance of various transportation subindices as a function of fuel prices in the mid-continent region since the March 2009 low, we see the relationship is not so simple. The fuel index I am using is a 60/40 blend of low-sulfur diesel fuel and 87-octane gasoline; the performance indices are of the S&P 1500 (NYSEARCA:ITOT) rail, trucking, and air freight indices relative to the S&P 1500 Supercomposite (INDEXNYSEGIS:SPSUPX).


Click to enlarge

The rail index, which includes firms such as CSX (NYSE:CSX), Norfolk Sothern (NYSE:NSC), and Union Pacific (NYSE:UNP), has been able to outperform the broad market in the face of rising fuel prices. The trucking index, which includes firms such as Con-way (NYSE:CNW) and JB Hunt (NASDAQ:JBHT), and the air freight index, which includes the aforementioned FedEx and UPS, have outperformed the broad market slightly over the past four years, but neither index has been able to build on its gains.

If we isolate the trucking index and map it as a function of fuel prices, we see a negative trend relationship, albeit a statistically insignificant one.


Click to enlarge

Why have the rails been able to absorb higher fuel costs? The answer lies in the types of cargo transported, the distances involved, and the high barriers to competition. Let's say you are shipping grain from the Midwest to New Orleans after the harvest season or coal to Norfolk for export; you cannot practically use another mode of transportation for the sheer quantities involved. The same applies to containerized cargo landing at Los Angeles/Long Beach, Oakland, or another West Coast port for transshipment eastward. Yes, you could hitch the container to a truck and drive it 2,000 miles, but that would be a money-losing venture.

The barrier to competition for railroads is, perversely, one of its drawbacks: Railroads, like pipelines, are point-to-point operations. Anyone trying to compete with a railroad or a pipeline over the long haul on a fixed route is in trouble. However, once the goods are delivered to a distribution node, final delivery becomes competitive.

As various transportation indices such as the Dow Jones Transports (INDEXDJX:DJT) hit nominal record highs, keep your eye on fuel prices. Higher fuel prices impinge, as we should expect, on trucking and air shipment firms. Railroads? Why, they just keep on trucking.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE