The railroad industry is poised to gain from the improvement in the U.S. economy characterized by increased investments, implementation of safety standards and an enhanced pricing environment. Moreover, the impressive third-quarter performance by most railroad operators is expected to continue. In addition, an improvement in operating ratios driven by better cost control will continue to propel growth for railroad operators.

A rising population tends to boost freight demand. According to the U.S. Department of Transportation, each American requires the movement of approximately 40 tons of freight per year, which clearly demonstrates the importance of railroads in the country.

Below, we discuss key factors that investors should consider before investing in the railroad sector:

Intermodal Strength

According to the Association of American Railroads (AAR), in the first 46 weeks of 2015, U.S. railroads reported cumulative volume of 12,815,842 carloads, down 4.9% from the same period last year. However, intermodal units over the same time frame increased 1.9% year over year to 12,311,269, reflecting the strength in the business.

Intermodal continues to generate significant revenues for major U.S. railroad companies. Per the Federal Highway Administration, freight shipments are expected to grow nearly 45% from 19.7 billion tons in 2012 to 28.5 billion tons in 2040. Thus, we expect railroads to increase the focus on intermodal expansion and tap underserved markets with highway-to-rail conversions.

Further, CSX Corp. (CSX – Analyst Report) plans to mitigate losses in its coal business with increased intermodal growth in 2016. Forging ahead with its plans, the company continues to step up highway-to-rail conversions to gain a significant share of the expected 9 million volumes in the East that are well-positioned for intermodal business. At the end of the first nine months of 2015, intermodal volumes for Norfolk Southern Corp. (NSC) and CSX improved 2.1% and 4%, respectively, from the figures posted a year ago.

Meanwhile, the American Trucking Association (ATA) expects intermodal freight volumes to increase 4.5% every year through 2021 while it will likely improve 5.3% annually post 2021. Such impressive intermodal freights growth will drive business for railroads considerably.

Crude by Rail: Emerging Market

The present slump in oil prices has not had as much dampening effect on U.S. production as many had been expecting some time back. According to  the U.S. Energy Information Administration’s (EIA) latest Short-Term Energy Outlook, crude oil production is on track to reach an estimated 9.33 million barrels per day in 2015, up from 8.70 million recorded in 2014. It is very likely, however that 2015 will prove to be a near-term peak, provided oil prices don’t stabilize or bounce back.