Coal is a key revenue-generating commodity for railroad operators. Naturally, the decline in domestic coal shipments has contributed big time to the dismal performance by U.S.-based railroad stocks so far this year. The struggles of the railroad operators have been exemplified by the 27.9% year-to-date decline in the Dow Jones U.S. Railroads Index.

According to the U.S. Energy Information Administration, coal exports have been soft mainly due to low fuel prices and weak global fuel demand. Increased output from other coal-exporting nations too has led to the current gloom.

Rail Traffic Data Highlights Woes

The American Railroads’ (AAR) latest U.S. rail traffic report (for week ended Sept. 19, 2015) reveals a 2.5% year-over-year decline in rail traffic (sum of total carloads and intermodal units). While total carloads for the week declined 5.5% to 285,320, intermodal volume was 281,414 containers and trailers, up 0.6% year over year. Six of the 10 carload groups posted weekly declines leading to the sorry picture with metallic ores/metals, petroleum products and coal showing the sharpest drops.

The year-to-date data unveiled by AAR is also disappointing with a 4.4% decline in total carloads and coal posting the steepest (9.2%) drop. Overall rail traffic is down only 1.1% year to date, thanks to the 2.5% gain in intermodal traffic.

In view of the above data, it can be said that coal has turned into a splitting headache for railroad operators. While exports continue to be affected by the strong dollar, softness in the energy sector has encouraged utilities to switch to burning natural gas (which is much cheaper).

U.S. Railroads Down

Coal-related headwinds are primarily responsible for share prices of the bigwigs in the U.S. railroad space shedding value this year. While shares of the Jacksonville, FL- based CSX Corporation (CSX – Analyst Report) have declined 26.8% on a year-to-date basis, the Omaha, NE-based Union Pacific Corporation (UNP – Analyst Report) is down almost 20% so far this year.

Furthermore, shares of Norfolk Southern Corporation (NSC – Analyst Report) which is headquartered in Norfolk, VA and the Kansas City, MO-based Kansas City Southern (KSU – Analyst Report) have declined 27.23% and 11.72% respectively on a year-to-date basis. The double-digit year-to-date decline witnessed in the Dow Jones transportation average index is primarily due to the below-par showing of the railroad operators.

Lackluster Q2 on Coal Woes