Rail traffic is largely a function of industrial production and commodity markets, both of which are showing signs of recovery. Overall rail freight traffic remains depressed compared with historical levels, but demand for coal, copper and other manufacturing inputs rises with an uptick in manufacturing, like the one we've recently seen.  An increase in industrial production in recent months suggests a recovery is taking place. In August, industrial producing increased a larger than expected 0.8%, following a 1% increase in July. Capacity utilization is rising off a historic bottom hit in June at 68.3%. As industrial production increases, so too, in turn, will demand for commodities and freight haulers.  Most rails are exhibiting strong fiscal discipline, partly to cope with freight demand that's still far down from pre-recession levels. Union Pacific ( UNP - news - people ), which is up 30.6% in 2009, is an example of how an efficient rail is riding out the downturn in freight demand.  Jim Oberweis recommended Baidu.com at $80 and urged readers to buy more in 2009 at $120. What should you do now at $395? Click here for the Oberweis Report.  During the second quarter, a 22% decline in carload volumes and lower fuel surcharges that get passed on to customers contributed to a 28% decline in revenue, compared with the same quarter in 2008. Union Pacific still earned $468 million in the second quarter as operating margins benefited from lower fuel expenses--down 68% year-over-year--and a 10% workforce reduction.  Volumes were under pressure across the board, but Union made up for low traffic by increasing velocity 20%, helping free cash flow rise to $442 million through the first half of 2009. The Omaha, Neb.-based railroad operator recently upped its quarterly dividend 23% to 27 cents per share. Union Pacific will deliver third-quarter results Oct. 22.  Special Offer: Gold gained 750% from 1976 to 1980 in the last bull market. In the current bull market, from 2001 to 2009, gold is up just 250%. Click here forGold Stock Strategistto help preserve your dollar wealth and to gear up for the wild bull market in gold.  Burlington Northern Santa Fe ( BNI - news - people ), the second largest U.S. railway operator by market capitalization, is rolling along as well. Revenues fell 26% to $3.32 billion, mostly due to lower fuel surcharges and reduced shipments of automotive and building products. Profits rose 15.4% to $404 million, or $1.18 per share, boosted by cost controls and better yields offsetting lower fuel surcharges. Expense reduction raised operating income to $797 million vs. $714 million year-over-year.  Burlington Northern Santa Fe (BNI)  Burlington shares have risen 58% since their mid-March low and are up 11.2 % year-to-date. Trading near $86 per share, the Fort Worth, Texas-based railroad operator is showing no signs of slowing down. Burlington broke through its 2009 high above $86 per share Oct. 14, and may be gearing up for a run to the 52-week high at $91.98. BNI used the 10-day exponential moving average as support in mid-October, and a large, bullish candle Oct. 14 may be the jumping-off point for another sustained rally.  Rising energy prices are another reason to be bullish on rails. Major railroads rely on coal shipments for a significant percentage of revenues, in some cases up to 20%. CSX Corporation ( CSX - news - people ) saw revenues fall 23% to $2.3 billion last quarter, mostly due to depressed coal volumes. Relatively low gas prices reduced the demand for other low cost energy sources, crimping demand for coal. The recent uptick in gas prices is good news for railroads, and as gas prices bubble up near $75 per barrel, coal demand may have upside.  Regional railways are garnering attention as well. Kansas City Southern ( KSU - news - people ) was the most optimistic railway operator last quarter after seeing plastics, grains, and auto shipment volumes improve. Kansas City Southern noted that traffic rising 11 out of the past 14 weeks may be a sign that freight traffic has finally bottomed out.  Matt Cavallaro is an equity analyst for stock market education company BetterTrades.com. Visit BetterTrades.com for more timely strategies and tactics to create cash flow with stocks and options. To contact the author, e-mail matt.cavallaro@bettertrades.com.
Railroad stocks are on a hot streak and there don't appear to be many obstacles on the track to higher valuations.