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With 4 out of 5 major North American railroad companies trading near their year high, we analyzed them as an opportunity to profit from their current momentum. At $62.21, Canadian Pacific Railway Limited (NYSE:CP) is trading at 0.67% from its year high. Union Pacific Corporation (NYSE:UNP) at $78.80 is trading at 1.02% from its year high. At $64.62, Canadian National Railway Company (NYSE:CNI) is trading at 2.18% from its year high and all-time high. Norfolk Southern Corporation (NYSE:NSC) at $57.91 is trading at 5.97% from its year high. And finally, CSX Corporation (NYSE:CSX) is the cheapest of the 5 from a year high point of view, trading at 13.44% from its year high, with a current price of $53.67.

Here is the rank by Market Capitalization (as of September 3, 2010) of these 5 major railroads companies.

Company

Market Capitalization (As of Sept. 3, 2010)

Union Pacific Corporation (UNP)

$39,208,122,000

Canadian National Railway Company (CNI)

$30,074,148,000

Norfolk Southern Corporation (NSC)

$21,346,494,650

CSX Corporation (CSX)

$20,375,654,490

Canadian Pacific Railway Limited (CP)

$10,492,960,700


All 5 companies are more volatile than the market. This measure of volatility is obtained by the Beta ratio. With a Beta of 1.08, NSC has a theoretical volatility 8% greater than the market. CNI, UNP and CSX have a Beta of 1.10, 1.17 and 1.22 respectively. With a Beta of 1.33, CP is theoretically the most volatile stocks of the group.

We compared the return of these 5 companies with the market (NYSEARCA:SPY) from the years 2000 to 2010 YTD (as of September 3). The covered period for CP starts in 2002 because CP was created in 2001 when the Canadian Pacific Railway's former parent company, Canadian Pacific Limited, spun off its railway operations. All paid dividends are included in the return for CSX, NSC, UNP and the market (SPY). For CNI and CP, you’ll find the return in both USD and CAD. The return in USD doesn’t include the paid dividends but the return in CAD includes them.

Year

(CSX)

(NSC)

(UNP)

(CNI) (In USD)

(CNI) (in CAD)

(CP) (in USD)

(CP) (in CAD )

Market (SPY)

2000

(13.48%)

(30.36%)

17.99%

12.85%

17.93%

N/A

N/A

(9.69%)

2001

38.20%

39.52%

13.89%

62.61%

74.70%

N/A

N/A

(12.09%)

2002

(18.09%)

10.47%

6.44%

(13.92%)

(13.78%)

1,03%

(1.37%)

(21.54%)

2003

28.36%

19.81%

17.59%

52.26%

27.16%

42.89%

19.07%

27.88%

2004

12.63%

54.55%

(1.48%)

45.19%

35.09%

22.24%

13.76%

10.23%

2005

27.74%

25.20%

21.50%

30.60%

28.84%

21.91%

19.89%

4.70%

2006

36.93%

13.70%

15.79%

7.59%

8.91%

25.77%

27.51%

15.61%

2007

29.31%

2.21%

37.98%

9.06%

(5.15%)

22.52%

6.00%

5.16%

2008

(24.42%)

(4.30%)

(22.42%)

(21.67%)

(2.04%)

(47.99%)

(34.68%)

(36.38%)

2009

52.05%

14.30%

35.94%

47.88%

30.30%

60.62%

41.00%

26.05%

2010 (As of Sept. 3)

11.67%

11.77%

24.68%

18.87%

18.17%

15.20%

15.12%

0.94%


Over the 11 periods observed, CNI outperformed the market 10 times in USD. CSX also outperformed the market 10 times, and each year since 2001. UNP outperformed the market 9 times. CP outperformed the market 8 times in USD. Finally, NSC outperformed the market 6 times. If we look at both the recession years of 2008 and 2001, the stocks with the best return for both years are CNI and NSC. In 2008, NSC had a return of -4.30% and CNI had a return of -21.67% in USD, mainly due to the depreciation of the CAD over the USD on that year. In local currency, CNI was negative by only 2.04% in 2008. In 2008, the market was negative by 36.38%. In 2001, the return of CNI was 62.61% in USD and 74.70% in CAD. NSC was the second best performing stock in 2001, with a return of 39.52%. The market was down by 12.09% in 2001. Those 2 stocks have theoretically the lowest volatility of the group.

Four of the five companies have a similar current yield. With an annual dividend of CAD $1.08, the current yield of CNI is 1.61% in CAD and 1.54% in USD. With an annual dividend of CAD $1.08, the current yield of CP is 1.67% in CAD and 1.57% in USD. The current yield of UNP and CSX is 1.68% and 1.79% respectively, with an annual indicated dividend of $1.32 and $0.96. NSC, with an annual dividend of 1.44$ has a current yield of 2.49%, the highest of the 5 companies. The market (SPY) has a current yield of 1.90%.

Let's have a look at the past dividend growth for the 5 companies and the market. The dividend growth for CNI and CP is in local currency.

Civil Year

(CSX)

(NSC)

(UNP)

(CNI) (in CAD)

(CP) (in CAD)

Market(SPY)

2000 to 2001

-33.33%

-70.00%

0.00%

11.44%

N/A

-29.10%

2001 to 2002

-50.00%

8.33%

0.00%

10.26%

N/A

41.15%

2002 to 2003

0.00%

15.38%

15.00%

16.28%

0.00%

6.55%

2003 to 2004

0.00%

20.00%

30.43%

17.00%

0.98%

15.63%

2004 to 2005

7.50%

33.33%

0.00%

28.21%

9.71%

14.02%

2005 to 2006

53.49%

41.67%

0.00%

30.00%

26.11%

13.78%

2006 to 2007

63.64%

41.18%

12.50%

29.23%

21.05%

16.87%

2007 to 2008

42.59%

27.08%

37.78%

9.52%

12.17%

2.18%

2008 to 2009

14.29%

11.48%

16.13%

9.78%

2.33%

-16.93%

2009 to 2010

9.09%

2.94%

11.11%

6.93%

4.55%

Probably negative


CNI is the only company among the 5 that raised its dividend each year since 2000, and the minimum rise per year has been 6.93% during the global period, which is excellent. Over the last 4 years, all 5 companies raised their dividend each year, reflecting a confident industry. The last three years weren’t that good for the market's dividend growth. SPY raised its dividend by 2.18% from 2007 to 2008. The dividend decreased by 16.93% from 2008 to 2009, and the dividend growth will probably be negative another year from 2009 to 2010.

We found that CNI has the best rising dividend history over the last 10 years. Moreover, the company has the lowest payout ratio of the 5 companies at 23.30%. With a TTM EPS of $4.25, a dividend of CAD $1.08, the dividend is safe and the company has flexibility to continue to increase it. UNP, CP and CSX have a payout ratio of 25.28%, 25.74% and 27.38% respectively. All these companies, with TTM EPS of respectively $4.51, $3.75, $3.36, and annual dividends of respectively $1.32, CAD $1.08, $0.96, have safe dividends and flexibility to increase them. NSC has a TTM EPS of $3.35 and an annual dividend of $1.44. Its payout ratio is the highest among the 5, at 40.60%. Even at this level of payout ratio, the dividend of NSC is safe and the company still has flexibility to increase it.

As of September 3, 2010, CNI has the lowest TTM P/E of the 5 companies at 15.20 (15.24 in CAD). CSX, CP, NSC and UNP have a TTM P/E of 15.97, 16.59, 17.29 and 17.47 respectively.

The railway companies are very profitable, both in good and bad times. With two recessions in the first decade of the millennium, these 5 companies have made profits quarter after quarter. If we take the year 2000 as a starting year, there have been 42 quarters completed to this point (10 full years + 2 quarters in 2010). UNP never reported a quarterly loss during that period: 42 quarters of profits for the company. Others have done well too: CNI, CSX and NSC have reported 41 quarters of profits out of the 42. Only one negative quarter happened during that period for these 3 companies. Finally for CP, taking the year 2002 as the starting year-- meaning 34 quarters completed, the company has made profits each one of these 34 quarters.

The revenues of railway companies are limited in North America. CNI is the company among the 5 that increased its sales the most over our comparison period. If we take the year 1996 as the starting year and the last completed year of 2009 as final year, CNI increased its sales by 84.41% during the period. (CAD $3.995B to CAD $7.367B). NSC increased its sales from 1996 to 2009 by 67.06% ($4.770B to $7.969B). UNP increased its sales from $8.786B to $14.143B for the same period, a rise of 60.97%. CSX is the only company that reported decreasing sales for the period 1996-2009. The sales decreased by 14.19% ($10.536B in 1996 to $9.041B in 2009). Finally, CP increased its sales for the period 2002 to 2009 by 20.25% ($3.472B to $4.175B).

When we look at the profit margin and operating margin of the railway companies, we can see they are very profitable. CNI has by far the best TTM profit margin and TTM operating margin of the group at 26.77% and 35.31% respectively. UNP has a TTM profit margin of 14.74% and a TTM operating margin of 26.94%. NSC comes 3rd with a TTM profit margin of 14.25% and a TTM operating margin of 27.15%. Then, CP with a TTM profit margin and a TTM operating margin of 14.21% and 21.91% respectively. Finally, CSX comes in last with 13.50% for the TTM profit margin and 26.51% for the TTM operating margin.

For the measure of financial strength, the MRQ (most recent quarter) current ratio is 1.36 for CNI, the best of the group. UNP, NSC, CP and CSX have a MRQ current ratio of 1.22, 1.20, 1.13 and 0.91 respectively. UNP and CNI have the lowest MRQ Debt/Equity ratio at 0.54 and 0.56 respectively. NSC, CP and CSX have a MRQ Debt/Equity ratio of 0.62, 0.86 and 0.93 respectively.

The following table shows the return of an investment in the 5 railroads companies made on December 31, 1999 to September 3, 2010. We also compared the return of the market (SPY) for the same period. (For CP, the return is from December 31, 2001 to September 3, 2010). All the paid dividends are included for UNP, CSX, NSC and SPY. The paid dividends are included for the return of CNI and CP in CAD but not for the return in USD for those 2 stocks.

Company

Return in USD

Return in CAD

Canadian National Railway Company (CNI)

636.83%

474.74%

Union Pacific Corporation (UNP)

292.84%

N/A

CSX Corporation (CSX)

272.87%

N/A

Norfolk Southern Corporation (NSC)

222.06%

N/A

Canadian Pacific Railway Limited (CP)

219.03%

121.21%

Market (SPY)

-10.17%

N/A


An investment made in CNI on December 31, 1999 had a return of 636.83% on September 3, 2010 in USD (474.74% in CAD). The return for the same period was 292.84% for UNP, 272.87% for CSX and 222.06% for NSC while the Market was negative by 10.17%. Buy and hold was definitely a good strategy over that period for the railway companies.

As you can see, the extra volatility related to the railroad companies has paid off for the past years and the fundamentals of these companies are still great today.

After our analysis, CNI is the company with the greatest fundamentals. The company is theoretically the second lowest volatile of the group with a Beta ratio of 1.10. The stock had excellent past return, including during the recession of 2001 and during the crisis of 2008 in local currency. The stock outperformed the market 10 times over the 11 last years (in USD). At 1.61% (in CAD) and 1.54% (in USD), the yield is decent. The company is the only one of the group that raised its dividend each year over the last 10 years. The dividend is rising and the minimum rise was 6.93% per year over the last 10 years. The payout ratio of CNI is the lowest of the group. The TTM P/E of CNI is also the lowest of the group at 15.20. CNI’s profit margin and operating margin are the highest of the group. The global financial strength is good. Finally, the company declared profits 41 quarters over the last 42 and CNI is the company that increased its sales the most since 1996 among the group.

CNI stands out from others according to our analysis, but we found that in both good and bad economic climates, each one of these 5 companies is profitable and gave excellent return to their shareholders over the last decade. Finally, if you plan to take a position in a railway company and accept less volatility associated with these stocks, NSC seems the more secure company of the group according to its higher yield of 2.49% and its lower Beta of 1.08.

Who said the buy and hold was dead? For the next 10 years, wouldn’t it be wise to be a passenger and sit in a railroad company while profiting from the current momentum?

Source for industry group: Morningstar, Inc.

Disclosure: Long in CSX, NSC and SPY. No position in CNI, UNP and CP

Source: Railroads: Profitable on Every Track, Both in Good Times and Bad