U.S. rails seen rolling along despite slowing economy

By Nick Carey

DETROIT (Reuters) - Despite a wobbly economy and sliding freight volumes, U.S. railroads have chugged along in recent quarters thanks to strong pricing -- and barring a deep and prolonged recession they show no sign of stopping.

"I think the railroads' pricing power story is going to last for several more years at least," said Keith Schoonmaker, an analyst at Morningstar.

Higher fuel costs are also seen likely to help the railroads take market share from trucking companies -- it takes three times as much fuel to move freight by truck than by train -- and improved productivity is expected to help bottom lines.

On April 15, Jacksonville, Florida-based CSX Corp (CSX.N: Quote, Profile, Research) was the first of the four major U.S. railroads to post first-quarter results, reporting a 46 percent rise in net profit that came comfortably above Wall Street forecasts -- despite a 2 percent drop in freight volumes.

"Strong fundamentals and pricing from CSX may bode well for other rails this earnings season," Morgan Stanley analyst William Greene wrote in a note for clients. "While higher fuel prices will weigh on earnings near-term, we will be watching ... for any signs of greater shifts from truck to rail."

Leading U.S. railroad Union Pacific Corp (UNP.N: Quote, Profile, Research) and smaller rival Norfolk Southern Corp (NSC.N: Quote, Profile, Research) report results next week. Burlington Northern Santa Fe Corp (BNSF) (BNI.N: Quote, Profile, Research) -- in which Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research) holds an 18 percent stake -- will report the following week.

Railroad analyst Tony Hatch of ABH Consulting said some specific issues separate CSX from some of the other railroads.

Like Union Pacific, CSX is still making major strides in improving productivity -- BNSF and Norfolk Southern began the same process earlier -- and like Norfolk Southern it also benefits from profitable U.S. coal exports on the east coast.