Lower Fuel Prices Help Railroads

In a complicated statement, equity analyst Morgan Stanley raised third-quarter earnings expectations slightly due to lower-than-expected fuel prices in the quarter. But that didn't stop the analysts from lowering fourth-quarter earnings expectations due to expected higher fuel prices.

A major issue for the railroads is the two-month lag between fuel cost increases and surcharges. "The temporal dislocation between revenue and expense should shave 1% to 4% off the railroads' fourth quarter earnings per share growth rate," said the report. "Moreover, railroads still do not have surcharge coverage across the entire portfolio, so higher fuel prices are still a negative for earnings." Longer term, the analysts anticipate some relief.

On the revenue side, volumes have been weak for over a year, said the Morgan Stanley report, and the forward view into 2008 is murky at best.