Right conclusion, but faulty reasoning that prospects for FreightCar America are not good

Implications: Per the author(s) of this blog, 10Q Detective, the prospects of increasing demand for railroad coal cars is not good and therefore the chances of accelerating growth at Freightcar America is also poor. There is so much that is wrong with this article and how it analyses the demand for new coal cars that it is hard to see how they managed to get to the right conclusion that the future prospects for Freightcar America are less than positive; but they did. Notwithstanding the current trends in railroad coal traffic (up 4.3% for the year), demand for coal cars is going to be soft for the next few quarters. Since coal cars are the main product of FreightCar America, its railcar deliveries will be lower in 2008 than in 2007.  

Analysis:  It might be stated that some railroad traffic rises and falls with general economic activity, but it is also true that some traffic is acyclical, that is, it rises and falls due to other factors. Coal is one such traffic segment, as might be concluded by the fall in production in 2007 and the rise in output so far this year. Therefore, to infer that future coal production will rise or fall if the economy improves or declines and therefore the need for coal cars will increase or decrease would be wrong. Demand for electricity does track with general economic activity, but the use of coal to generate electricity is dependent on many other factors, not the least of which are the price of natural gas and the power of the environmentalist in influencing the choice of fuel by electric utilities. At the present time, it is still too early to say how coal production change in the future.   The second problem with the commentary is the assumption that the railroads need to make investments in coal cars in the future. For the past twenty five years, most of the railcars that have been added to the national coal car fleet were bought by leasing companies or electric utilities. Like today, the railroads did not have the capital resources to invest in both their physical plant and their rolling stock and they elected to allow other companies to supply cars to the national fleet. Leasing companies might be worried that the new found prosperity of the railroads might lead them to once again buy railcars for their own fleets, but car builders need not worry that there will not be enough capital to fund future acquisitions.   With so many erroneous assumptions, how did the author(s) end up with the right conclusion? To be brief, too many railcars were built in the past few years and the railroads have improved their operations enough to produce a large surplus of coal cars. The surplus will dampen demand for several months.