The rebound of the global economy should continue to facilitate a greater amount of imports and exports to the United States. Of course, manufacturers and retailers will seek out ways to reduce their transportation costs and improve profitability. We believe there are a number of opportunities for intermodal transportation operators in the United States in the coming years.

What is Intermodal?

Intermodal freight transport involves the transportation of steel containers via ship, truck, or rail. This method of transportation is intended to limit the handling of merchandise, thereby reducing possible damage to products and transit times. In the next decade, we expect shippers, railroads, logistic firms, and truckers to continue to form partnerships and invest billions in their intermodal networks.

The health of the U.S. housing market is a good barometer of intermodal traffic. Intermodal operators haul a number of products from the retail, industrial, and agricultural industries. In particular, the demand for furniture accounts for roughly 10% of all 20-foot containers. As the housing market improves, we expect demand for kitchen appliances, electronics, and other home décor goods to boost intermodal volumes.

Where do railroads fit in?

We believe railroads are well positioned to capture market share in this growing sector. U.S. rail intermodal hauled nearly 12.3 million containers and trailers in 2012, which was the second highest total ever recorded. Improvements in network service and infrastructure have helped lower costs and enticed shippers away from trucks and barges. Additionally, rising fuel prices and tougher trucking regulations have allowed railroads to become more-cost competitive on short-haul transportation. We believe that concerns of climate change will continue to help the competitiveness of railroads, given that such carriers are four times less fuel-intensive than trucks. 

Union Pacific (UNP) and Burlington Southern have historically dominated the intermodal market, thanks in large part to West Coast ports. However, the eastern railroads, Norfolk Southern (NSC) and CSX (CSX), ought to gain more share, given the highway congestion in the East, increased capacity, and the expansion of the Panama Canal. Canadian Pacific (CP) and Norfolk Southern, meanwhile are two railroads that are heavily levered towards the intermodal business at 25% and 20% of total revenues, respectively.

Capital investments?

Railroads have been investing heavily in intermodal operations over the past decade. Billions of dollars have been spent on upgrading tracks, terminals, yards, and signaling systems. Additionally, railroads have invested in improving clearances for tunnels and bridges to enhance their double-stacking capabilities (placing containers on top of each other). We believe companies will continue to look to bolster their double- stacking operations, given the improvement to productivity and profits.

Norfolk Southern’s Crescent Corridor is expected to significantly expand the company’s intermodal network. The Crescent Corridor will span 1,400 miles along the East Coast, adding 25-30 new trains into service daily. The total cost of the expansion should range between $2.5 billion and $3.0 billion. Estimates suggest that the network improvements could take several thousands of truckloads off highways. The project has largely been completed and management believes that its intermodal capacity will increase by 20% to 25%.

In 2008, CSX launched an $850 million infrastructure initiative to improve its freight transportation between the Mid-Atlantic ports and the Midwest. The project is set to be finished by 2015 and should provide a nice boost to the company’s intermodal volumes. The National Gateway is expected to  lower transportation costs, increase the length of hauls, and better compete with its rivals. These network improvements should allow eastern railroads to gain some market share from their western counterparts.

We believe intermodal transportation will continue to trend in favor of railroads. Over the next few years, railroads should be able to gain market share, due to improved productivity, tougher trucking regulations, and rising fuel prices. Additionally, a housing recovery and a stronger overall economy should help drive solid gains in volumes and pricing. As such, we believe these investments will help lift bottom lines across the railroad industry in the coming years.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.