Weak Coal Demand Still a Problem for the Rails

Coal is out of favor. If only coal companies felt that pinch, it wouldn't be so bad. However, railroads are also feeling the pain. Third quarter results from CSX , Union Pacific , and Kansas City Southern suggest the fourth quarter won't see much improvement on the coal front.

Hauling it
Union Pacific, for example, saw coal shipments rise sequentially from the second quarter, but fall 7% year over year. That was driven by a contract loss, which pushed volume in Union Pacific's Colorado and Utah business down about 17%. There was an 8% decline out of the Powder River Basin (PRB). 

Overall, Union Pacific was able to increase its prices and improved coal revenues by 2%. So the company has been able to make the best of a bad situation. However, the fourth quarter is already in catch-up mode, as heavy snow curtailed shipments out of the PRB in early October. Kansas City Southern wasn't as lucky in the quarter, experiencing a 2% revenue drop.

Kansas City Southern's typically strong third quarter coal business didn't live up to expectations because of a mild summer and the early season shutdown of two coal-fired plants that it serves. Interestingly, coal falls into Kansas City's Energy business, which saw a volume increase of 2% in the quarter. Revenues from the entire segment were up 6%.

Offsetting weak coal volumes in the segment were frac sand, pet coke, and crude oil. In fact, the 15% increase in frac sand volumes speaks to one of the longer-term issues facing coal—increased U.S. production of natural gas. While that's a benefit to Kansas City Southern's business on one side, it suggests that the coal business won't see a pick-up in the fourth quarter.

CSX, meanwhile, lamented the fact that there is now "greater variability in both our export and domestic coal business." The company's coal revenues were down 9% on a 7% decline in domestic coal volume and a 10% decline in export coal. That said, CSX has been trying to help out its export coal customers, charging less for its services. The goal is simply to "keep our producers in the marketplace during this downturn until it ticks back up."

Market share losses today could spell big trouble in the future, so CSX has been willing to take a near-term hit to ensure long-term profits. Don't be surprised to see the company's coal business pick up in the fourth quarter, however, because Hurricane Sandy took a notable toll on the fourth quarter of 2012. In other words, next quarter's results won't be indicative of the broader trend—CSX management expects the broader industry weakness to linger at least into early 2014.

Solid overall
The negative coal news hidden inside third quarter earnings at CSX, Union Pacific, and Kansas City Southern suggests that the fourth quarter won't be a good one for the coal miners. The railways' expectation of weak domestic and export demand lasting into 2014 is further bad news for the coal miners.

CSX Chart

CSX data by YCharts

However, this soft underbelly hasn't stopped the railways from posting relatively solid results. That's because coal has become a smaller portion of their overall businesses. All three of these railways saw top and bottom line growth in the quarter on a year-over-year basis. Intermodal has been a notable industry bright spot.

So while coal has been an issue, CSX, Kansas City Southern, and Union Pacific have been able to overcome the drag. That means that coal could eventually be a notable positive if the market does nothing more than stabilize. If coal volumes pick up, this segment might actually be a big revenue driver. That won't happen in the fourth quarter or even in early 2014, but keep an eye on the second half of next year.  

Putting your money where your mouth is
This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!


The article Weak Coal Demand Still a Problem for the Rails originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story