Jason Seidl: What

Dahlman Rose & Co. Transportation Analyst (and Railway Age Contributing Editor) Jason Seidl issued an investment advisory Friday that put the recent (and continuing) decline in railroad stocks in a broad context that gives investors solid grounds for holding onto their shares.

His basic finding: ”Although we do not believe a recession is looming, economic growth is likely to moderate over the balance of the year and beyond. We are revising our 2011 and 2012 earnings estimates to reflect the tempered macro outlook, but believe 3Q11 results will be somewhat better than investors’ low expectations.”

“We have revised the earnings estimates for all companies in our researchuniverse—except UPS and FedEx, whose estimates were recently revised … We believe 3Q11 results will generally be solid and better than expectations … somewhat of a rally in transportation stocks that appear to have been oversold,” said Seidl (pictured at left).

“The economy is still growing, albeit at a slow rate. Rail traffic growth should improve as weather issues subside and comparisons ease, and commentary coming from many freight carriers does not point to a major downturn. That said, we believe the negative market sentiment stemming from global economic fears could cause a large enough impact on consumer confidence to dampen demand further.

“In rail, we continue to favor Union Pacific for its fourth-quarter legacy repricing opportunities and strong balance sheet.

“Not surprisingly, the performance of the freight transportation industry is strongly tied to that of the overall economy. In the most recent economic cycle, combined North American Class I rail traffic began to fall in the second half of 2008, just as the economy was slipping into a recession. In 2009, rail traffic was down 16% from 2008 traffic, which in turn was down 3.2% from the prior year. U.S. GDP slipped 4% in 2009, following a 0.3% decline in 2008. Comparing annual GDP growth to rail traffic growth,  the latter has generally earlier and more pronounced shifts in the economic cycle, suggesting that rail volumes could be viewed as a coincident, if not leading indicator of economic activity.

“While GDP growth is under 1% YTD in 2011, rail traffic growth is 2.8%, perhaps suggesting that further economic growth, however anemic, remains possible. This is supported by commentary made by many freight executives at our recent Dahlman Rose Transportation Conference who predicted slow growth but believe another recession was unlikely.

“Most recently, Kansas City Southern, whose rail traffic is up 15% QTD and 9% YTD, said at its annual short line conference that it does not see signs of an economic downturn.

‘North American Class I rail volumes are up nearly 3% YTD from the sameperiod last year. This is down from the 12% growth achieved in 2010. While the 2011 growth deceleration is largely attributable to tougher comparisons and unusually severe weather, we believe it is also partly due to slightly softer demand, especially in the latter part of the year-to-date period, with the third-quarter volumes up a mere 0.5% thus far.

“Although business fundamentals remain largely intact for most freight carriers and their customers, the negative market sentiment stemming from global economic fears could cause a large enough impact on consumer confidence to dampen demand further. In the latest survey completed by NABE in August, economists expect U.S. GDP to rise by only 1.5% at the end of this year, down from a 3.1% GDP growth forecast made in the May survey.” Seidl said.