(Reuters) - Railroad shipments of lumber are gaining momentum, signaling a construction upturn that should drive up shipping volume of consumer products from appliances to furniture.
This mounting demand for construction and household goods bodes well for Union Pacific Corp (UNP.N), CSX Corp CSX.N, Norfolk Southern Corp (NSC.N) and Kansas City Southern (KSU.N) as they report earnings for a quarter that was crimped by a deep drop in coal shipments.
Auto and intermodal shipping - the movement of goods in containers that can be shifted between modes of transportation such as from train to truck - have more than offset the coal drop triggered by a mild winter and low natural gas prices.
“The implication of stronger lumber shipments is that if homes are getting built then homes are being furnished,” said Jeffrey Kauffman, senior research analyst at Sterne Agee in New York. “That is going to drive intermodal volume - furniture, PVC piping, and also auto sales can be related to new homes.”
For the first half of this year, U.S. railroads hauled 11.8 percent more carloads of lumber and wood products than the same period a year earlier, the American Association of Railroads (AAR) said.
This was the third biggest gain of any of 20 categories tracked by the group, behind the 38.2 percent jump in petroleum products and 21.6 percent rise in motor vehicles and equipment.
In the same six-month period, carloads of grain fell 11.9 percent and coal dropped 10.7 percent.
Lumber itself represented 2 percent of the $65.3 billion total U.S. rail revenue generated by commodities carloads in 2011, the American Association of Railroads (AAR) said.
But the consumer goods category, which are finished goods including TVs and appliances, drove about 20 percent of the revenue, second only to 24 percent for coal.
Union Pacific’s Chief Executive Officer Jack Koraleski, in a July 2 interview with Reuters, said the company has taken some lumber-moving equipment out of storage for the first time since 2008 to handle the increased volume.
The No. 1 U.S. public railroad’s lumber carloads peaked at 226,000 in 2006 before plunging 65 percent to 79,000 in 2009 and then rising to 89,000 last year.
“We’re not ready yet to declare victory, but by the time we get to the end of the year we’ll probably still be somewhere in the neighborhood of 50 percent below our best year ever with lumber,” or 113,000 carloads, Koraleski said. “That’s better than it has been and headed in the right direction.”
Coal rail shipments are now headed upward, with utilities burning off stockpiles to produce electricity for air conditioning during this steamy summer, analysts agree.
“Coal looks like it has hit the bottom and is starting to come back up,” said Koraleski.
The worst may also be in the past for housing, though the recovery will be slow and uneven, according to a Reuters poll published on Friday.
U.S. construction spending in May rose to its highest level in 2-1/2 years.
Sales of new single-family homes jumped to a two-year high as prices also rose in May. Previously-owned home sales declined 1.5 percent in May on the heels of a 3.4 percent jump the prior month, and median home prices rose for a fourth straight month.
Home funding company Freddie Mac this week said average 30-year mortgage rates hit a record low 3.56 percent, which can add incentive for creditworthy borrowers looking to buy a home.
CSX and Kansas City Southern, the No. 2 and No. 4 biggest public railroads, respectively, kick off second-quarter earnings on Tuesday. Union Pacific follows on Thursday and No. 3 railroad Norfolk Southern on July 24.
Cost controls and strength in autos, intermodal, lumber and petroleum shipments are expected to bolster profits for the rails that otherwise were pressured by coal.
“Any large moves off of earnings would in fact be a surprise as the option market reflects limited risk thus far” for the railroads, said Ophir Gottlieb, managing director of Livevol, an options analytics firm in San Francisco.
CSX earnings are seen at 47 cents, on average, up a penny in the quarter from a year ago, with revenue little changed around $3 billion, according to Thomson Reuters I/B/E/S.
Kansas City Southern, less exposed to coal than its bigger peers, is seen posting earnings of 84 cents versus 71 cents a year ago on revenue of about $571 million versus $535 million.
Union Pacific’s earnings are seen rising to $1.96 per share from $1.59, with revenue of $5.2 billion versus $4.9 billion. Norfolk Southern’s earnings are seen at $1.53 per share from $1.38 on revenue of $2.94 billion versus $2.87 billion.
“The rails appear to be coming out of a nuclear winter largely intact — passing stress tests that few other industries could survive and underscoring the resilience of these businesses,” Jefferies & Co analysts led by Peter Nesvold, wrote in a note.
Reporting by Lynn Adler, additional reporting by Doris Frankel in Chicago; editing by Patricia Kranz, Bernard Orr