The other day, I discussed a strategy for dealing with a recession in 2013 and provided five stock quick picks. In that article, I liked Kansas City Southern (KSU) and Union Pacific Corporation (UNP) because relative to the rest of the railroad industry, the two companies had leading net margins and decent current ratios. Now, thanks to comments by Dyjech and LonW, I have more reasons to like UNP and KSU.
According to the Chicago Tribune, the Mississippi River water levels are at record lows and threatening to choke off channels transporting billions of dollars of cargo a year. These record low water levels, caused by the same drought that hit America's farmland this summer, mean increased shipping times and higher costs for the barge operators. As the barge owners pass the cost onto the farmers and commodity manufacturers, alternative modes of transport will become more attractive. So what does this have to do with KSU and UNP?
Railways Offer the most Value of any Alternative
As you can see from the chart below, there are only so many alternatives to the Mississippi barges. Farmers and commodity manufacturers can choose between trains, trucks, or airplanes (the water levels are far too low for Panamax containerships or VLCCs).
Trains offer the best value because trains can carry far more cargo than a truck or plane, offer a wider range of weights and shipment times, and are more reliable. Since trains are able to transport so much more cargo, they can offer a lower rate per pound, making railways the cheapest mode of transport after waterways.
So what makes UNP and KSU so special relative to the rest of the industry?
The Railway Network
Below are maps of the Mississippi River, the Kansas City Southern rail system and the Union Pacific rail system. As you can see, both KSU and UNP have excellent coverage of the Mississippi River.
I think UNP might be better positioned to take advantage of this opportunity than KSU due to its railways proximity to the river around Missouri, Tennessee, and Arkansas. However, both offer better coverage than competitors: Norfolk Southern Corp. (NSC), BNSF, and CSX Corp. (CSX).
Railways offer the best value to commodity manufacturers as an alternative to the Mississippi barges. Union Pacific Corp. and Kansas City Southern both have rail networks that are better suited than competition to prosper as the Mississippi River becomes a less viable option. I believe the rail network of Union Pacific is better positioned to capitalize on lower Mississippi Barge traffic due to its better coverage of the river near Missouri, Tennessee, and Arkansas than KSU. I highly recommend you read my original article discussing these two stocks before you decide to invest in either company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.