When CSX (CSX) shares sold off last week, I was hoping the move would substantially take down other railroad operators. CSX said it missed per-share earnings estimates by a penny -- but its real sin was in cutting 2014 guidance on a decline in coal revenue. Domestic coal volumes are projected to be flat this year vs. 2013, while export coal volumes are expected to drop by 20%. Total coal revenue per carload is anticipated to fall by the low single digits for the year.
On that mix of bad news, CSX shares dropped 6.8% Thursday.
However, the other big railroad operators in the U.S. and Canada barely budged. Union Pacific (UNP) stock fell just 1.3% on the day. Canada's big two, Canadian Pacific Railway (CP) and Canadian National Railway (CNI) respectively dropped by just 0.27% and 1.6%.
To the chagrin of bargain-hunters such as myself, it looks as if the markets do actually understand that the bad results at CSX come from a coal problem, rather than a railroad-sector issue. As investors have seemed to grasp, the other big rail networks don't have anywhere close to the coal exposure that CSX does.
Specifically, a huge ratio -- about 27% -- of CSX's 2012 revenue came from shipping coal. Moreover, 80% of this coal comes from the relatively high-cost fields of Appalachia, which have been losing market share to lower-cost coal from Wyoming's Powder River Basin.
Compare those numbers with the coal exposure of Union Pacific, or of the Canadian railways. Just 20% of 2012 sales at Union Pacific came from energy products generally -- and, of that, 65% was coal from the Powder River Basin. That works out to about 13% of total revenue. At Canadian Pacific, the coal percentage was just 11% that year, and Canadian National came in at an even lower 7%.
But that's not the end of the CSX coal problem. Because the company operates an Eastern network, it isn't significantly participating in the U.S. oil boom from such fields as the Bakken in the Dakotas. So, while coal shipments might be falling at a railroad like Union Pacific, oil shipments by tank cars are climbing. For example: Burlington Northern, a Union Pacific competitor now owned by Warren Buffett's Berkshire Hathaway (BRK.A/BRK.B), reported daily volume of 400,000 barrels of oil in 2012 and a climb to 500,000 daily barrels last year. North American rail transport of crude grew by 360,000 barrels a day in 2013, according to FirstEnergy Capital in Calgary.
CSX isn't just missing out on the oil boom, but last year's record grain crop as well. At the same time, these other three rails are geographically positioned to take advantage. Separately, it also looks as though Union Pacific will reap benefits from increasing automotive imports from Mexico: The company estimates that it carries 85% of all auto imports from that country.
On an absolute price-to-earnings basis, Union Pacific stock is the cheapest of these three, with shares priced at 17.9x earnings estimates for 2013. Canadian National is at 19x, and Canadian Pacific is at 25.6x. But growth isn't projected to be equal at these railroads. The P/E-to-growth (PEG) ratio on projected earnings is lowest for Canadian Pacific, at around 1x, and highest at Canadian National, whose PEG is 1.5x. Union Pacific falls at 1.3x.
Factoring in the uncertainty of all revenue and earnings projections -- and with the lower risk that comes with multiple sources of growth -- I'd give a slight nod to Union Pacific (which, by the way, is due to report earnings Thursday).
I just wish it had sold off further with the CSX news.