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One of the challenges of having oil and gas production increasing from so many sources throughout the nation is being able to build all of the infrastructure necessary to bring the additional production to market. Although thousands of miles of new pipeline have been built over the past few years, there are still areas where production cannot be brought to market via pipeline. Energy production in those areas commands a lower price due to the extra costs necessary for alternative transport (Truck or rail).

Pipeline transport is the ideal and low cost way to bring new production to market. However, there are reasons why pipelines are sometimes slow to be built or do not get built at all. These include prohibitive regulation or environmental concerns (eg, Keystone), acquiring financing and/or not being able to sign the large term fixed fee contracts from producers to the extent necessary to finance and build a new pipeline trunk.

This is leading to more and more oil production being brought to market by rail. The primary beneficiary of the increasing amount of oil being brought to market via rail are a couple of railcar manufacturers below.

Trinity Industries (NYSE:TRN) provides products and services to the industrial, energy, transportation, and construction sectors primarily in the United States, Canada, Mexico, the United Kingdom, Singapore, and Sweden. The company's Rail Group manufactures and sells railcars, tank cars; and railcar components, such as couplers and axles.

4 reasons TRN has upside from just over $35 a share:

  1. The stock sells for less than 10x forward earnings, a discount to its five year average (17.9).
  2. Trinity has the highest rating from S&P at "Strong Buy" with a $42 price target. It is also the biggest player in this space and is likely to remain given that Greenbriar (GBR) recently rejected Carl Icahn's offer to merge it with American Railcar.
  3. Although the company's increasing earnings and revenues are primarily being driven by increasing railcar demand (backlog quintupled from 2010 to year end 2011), the company could also be helped if its construction business (17% of revenues) continues to improve.
  4. The company has beat earnings estimates four of the last five quarters. The average beat over consensus during that time period averaged 15%.

American Railcar Industries (NASDAQ:ARII) designs and manufactures hopper and tank railcars in North America

4 additional reasons ARII is a solid pick at $32 a share:

  1. Insiders have been net buyers of the stock over the last year and a half and the stock has a five year projected PEG of under 1 (.80).
  2. Consensus earnings estimates for both FY2012 and FY2013 have moved up nicely over the past three months and ARII sells for less than 9.8x forward earnings, a deep discount to its five year average (37.6).
  3. It recently resumed paying a dividend. It will pay a quarterly dividend of $.25 a share, making the shares yield 3.1%.
  4. The outlook for covered hoppers (just over 30% of total revenue) is solid. Fertilizer, Grain and Fracking Sand deliveries should remain strong for the foreseeable future and demand will benefit if the housing recovery continues (Cement).
Source: The Oil Boom's Unexpected Beneficiaries: Railcar Manufacturers