Commodity Slump Hammers Railroad Stocks

Fourth-quarter earnings reports confirmed what many traders had been expecting— railroads like Union Pacific Corporation UNP and Norfolk Southern Corp. NSC were hammered by the drop in energy prices, according to the Wall Street Journal.

Rail volumes have been under extreme pressure due to ultra-low oil prices and most companies' crude oil and fracking sand shipments have dwindled significantly. However, while the industry's earnings reports all took on a cautionary tone, some investors say that investing in railroads isn't completely out of the question.

Cost Cutting

CSX Corporation CSX painted a bleak picture of the rail industry earlier in January, saying that the amount of pressure on rail volumes at the moment were at similar levels to those seen during a recession. Union Pacific's earnings revealed that the company furloughed 3,900 employees in order to cut down on expenses while Canadian Pacific Railway Limited (USA) CP said it is planning to cut some 1,000 jobs in the coming year.

Related Link: Why The Canadian Pacific-Norfolk Southern Situation Is Getting Hostile

Not Just Oil

Coal is another worry for rail execs, Union Pacific said that relatively mild temperatures caused shipments to decline in 2015. In the coming year, coal shipments could continue to wane as more focus is placed on clean energy. Auto shipments was one of the only bright spots for railways, Union Pacific reported an 8 percent rise in transporting vehicles; but many are skeptical as to whether car sales can continue at current levels. 2015 was a bumper year for many automakers, and some argue that sales will dwindle in the coming year despite economic improvements and low gasoline prices.

Any Reason To Invest?

The bleak reports coming out of the railroad industry appear to suggest that investors stay away from the sector, but some traders disagree. Many argue that quality companies reveal themselves in times of market turmoil, and this year could be a good time to buy while prices are low.

CSX was able to improve its operating ratio from 71.5 percent to 69.7 percent in 2015, a sign that the company is able to operate efficiently even under dire circumstances. The firm is also looking likely to raise its dividend in the coming year, something that could be appealing for income investors. Union Pacific is another popular pick among investors, as the company has a solid market presence and a relatively low debt to equity ratio compared to peers in the industry.