Do Railroads Belong in Your Retirement Account?

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 |  Includes: ARII, CNI, CP, GWR, KSU, NSC, RA, TRN, UNP
by: Robert Weinstein

A political leadership that has the "Way" will surely have a military leadership that has intelligence and ability.
--The Art of War

The combination of greater movement of goods, containerization of shipments, and higher diesel costs has given a boost to the volume moving along the rails. The greater volume and demand has resulted in recent gains in valuations within the railroad industry. Furthermore, largely as a result of the higher diesel prices railroads have been able to capture market share from trucking companies.

Large movers of packages like UPS and FedEx (NYSE:FDX) have also increased their utilization of railroads, resulting in lower costs for the small package carriers, according to The Wall Street Journal. I took a look at the railroad industry and the publicly traded companies.

The largest of the railroads and United Transportation Union, the largest railroad workers union have recently reached a tentative contract. The contract has not been ratified and it would appear the soonest a vote will happen is the middle of June. The contract covers wages, benefits and working conditions for the next five years.

I also looked over the numbers of two related companies that have recently been doing well. Rail car manufacturers' fate and stock price largely ebb and flow along with the rails. Even though containerization is considered a factor in the improving results of railroads, rail cars have also seen an improvement in demand, with stock prices well off recession lows.

The implementation of containerization of shipments and higher diesel prices has given the railroad systems a larger share of the movement of goods throughout the country. This rise in the utilization of railroad systems has led to recent gains in the valuations within the railroad industry. As a result of higher diesel prices, railroads have been able to capture a large market share from trucking companies. Companies that move a lot of packages like UPS and FedEx have also turned to Railroads to lower shipping costs, according to The Wall Street Journal. Because of these observations, I took a look at the Railroad industry and related publicly traded companies.

The largest of the railroad companies and United Transportation Union, the largest railroad workers union, have recently reached a tentative contract. The contract has not yet been ratified and it appears the soonest a vote will occur is in the middle of June. This contract covers wages, benefits and working conditions for the next five years. The signing of this contract will be another positive in the status of this industry. A related industry that has shown recent growth is rail car manufacturers and their stock prices chug along or slow down in relation to the railroad industry. This is evident in the stock prices of these manufacturers as they currently trade well off recession lows.

Can an increase in volume being shipped by railroads spell profits for rail carriers and related companies, and are any of the companies worth putting into a retirement account? We will take a look at a few companies and see if they might be a good fit. This is the forth article in my series about stocks that may be good fits for retirement investing. I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades, and while not totally the same in my retirement account investments the concept is the same. The last component for entry is the ability to sell put options at or near the offer price. I want the best of it when I enter into a trade, and I will not start out by paying a spread unless it is less than five cents and/or < 1% of the option premium.

Wells Fargo Securites LLC senior analyst Anthony Gallo recommended clients be “overweight” rail stocks instead of “market weight,” citing expectations for continued rail-volume growth in 2011. Norfolk Southern (NYSE:NSC) on Tuesday posted 31% profit growth in the fourth quarter. Earlier this week CSX Corp. CSX reported a 42% increase in fourth-quarter profit, while Union Pacific Corp. UNP reported a 41% earnings increase last week.

To do well in the market, you should know the stocks you track inside and out. After all, every journey begins with a single step, so let us start by considering some interesting companies, which will give you a starting point for possible stocks that you might buy for your retirement accounts. For selection as a long-term hold in my own retirement accounts, a stock should exhibit the following characteristics:

  • A dividend yield higher than I can earn in a bank account?
  • Rising dividend history?
  • Rising revenue year-over-year?
  • Rising earnings year-over-year?
  • Rising EBITDA year-over-year?
  • Option trading available for the lowest risk entry possible? (Also, how could we possibly buy an options trading related company that doesn’t have options available to trade?)

Norfolk Southern Corporation Co (NSC) is a $26.62 billion market cap company. Norfolk Southern Corporation, through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. Norfolk Southern’s export coal tons grew 24% in the quarter, and 42% sequentially. While total company yields rose 8%, coal yields grew 16% primarily due to a better mix of export coal and favorable contract renewals in utility coal in early January.

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As of December 31, 2009, it operates approximately 21,000 miles in 22 states and the District of Columbia. The company was founded in 1883 and is based in Norfolk, Virginia. NSC reported 1st qtr 2011 earnings of $1.00 per share on 4/27/11. This beat the $0.90 consensus of the 27 analysts covering the company. The next reporting quarter estimated mean earnings is $1.27 per share. The low estimate is $1.17 and the high is $1.4 per share. The current trailing twelve months P/E ratio is 17.68 (ttm) and the forward P/E ratio is 13.45.

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  • Rising revenue year-over-year? Yes, $9.51 for 2010 vs. $7.96 billion for 2009.
  • Rising earnings year-over-year? Yes, $1.49 million for 2010 vs. $1.03 million for 2009.
  • Rising EBITDA year-over-year? No, $.36 million for 2010 vs. $1.622 million for 2009.
  • A dividend yield higher than I can earn in a bank account? Yes, $1.6 is a current yield of 2.14%.
  • Option trading available for the lowest risk entry possible? Yes.

RailAmerica, Inc. (NYSE:RA) is a $861.17 million market cap company. RailAmerica, Inc. engages in the ownership and operation of short line and regional freight railroads in North America. As of December 31, 2009, it operated a portfolio of 40 individual railroads with approximately 7,400 miles of track in 27 U.S. states and 3 Canadian provinces. The Jacksonville-based operator of short-line railroads reported a $2.5 million loss in first quarter 2010. RailAmerica’s revenue in the first quarter 2011 increased 9 percent to $125 million despite its carload movement declining 1 percent compared with the same period last year, according to a news release.

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The company was incorporated in 1992 and is headquartered in Jacksonville, Florida. RA reported 1st qtr 2011 earnings of $0.12 per share on 4/27/11. This beat the $0.11 consensus of the 11 analysts covering the company. The next reporting quarter estimated mean earnings is $0.20 per share. The low estimate is $0.17 and the high is $0.23 per share. The current trailing twelve months P/E ratio is 35.2 (ttm) and the forward P/E ratio is 17.38.

  • Rising revenue year-over-year? Yes, $490.29 for 2010 vs. $425.77 million for 2009.
  • Rising earnings year-over-year? Yes, $19.12 million for 2010 vs. $2.91 million for 2009.
  • Rising EBITDA year-over-year? Yes, $25.97 million for 2010 vs. $19.21 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

Genesee & Wyoming Inc. (NYSE:GWR) is a $2.58 billion market cap company. Genesee & Wyoming Inc., through its subsidiaries, owns and operates short line and regional freight railroads in the United States, Australia, Canada, and the Netherlands. The company’'s railroads transport various commodities.
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Genesee & Wyoming Inc. was founded in 1899 and is headquartered in Greenwich, Connecticut. GWR reported 1st qtr 2011 earnings of $0.52 per share on 4/28/11. This missed the $0.57 consensus of the 16 analysts covering the company. The next reporting quarter estimated mean earnings is $0.71 per share. The low estimate is $0.67 and the high is $0.74 per share. The current trailing twelve months P/E ratio is 31.68 (ttm) and the forward P/E ratio is 20.11.

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  • Rising revenue year-over-year? Yes, $630.2 for 2010 vs. $544.87 million for 2009.
  • Rising earnings year-over-year? Yes, $78.67 million for 2010 vs. $59.93 million for 2009
  • Rising EBITDA year-over-year? Yes, $108.83 million for 2010 vs. $75.99 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

Union Pacific Corporation (NYSE:UNP) is a $50.93 billion market cap company. Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. It has approximately 32,094 route miles linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways, and provides several corridors to Mexican gateways.
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Union Pacific Corporation was founded in 1862 and is based in Omaha, Nebraska. UNP reported 1st qtr 2011 earnings of $1.29 per share on 4/20/11. This missed the $1.31 consensus of the 30 analysts covering the company. The next reporting quarter estimated mean earnings is $1.58 per share. The low estimate is $1.40 and the high is $1.75 per share. The current trailing twelve months P/E ratio is 17.84 (ttm) and the forward P/E ratio is 13.48.

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  • Rising revenue year-over-year? Yes, $16.06 for 2010 vs. $13.37 billion for 2009.
  • Rising earnings year-over-year? Yes, $2.78 million for 2010 vs. $1.89 million for 2009
  • Rising EBITDA year-over-year? Yes, $4.43 million for 2010 vs. $2.97 million for 2009.
  • A dividend yield higher than I can earn in a bank account? Yes, $1.52 is a current yield of 1.47%.
  • Option trading available for the lowest risk entry possible? Yes.

Canadian National Railway Company (NYSE:CNI) is a $35.22 billion market cap company. Canadian National Railway Company, together with its subsidiaries, engages in the rail and related transportation business in North America. It provides transportation for various goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, and intermodal and automotive products.
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The company was founded in 1922 and is headquartered in Montreal, Canada. CNI reported 1st qtr 2011 earnings of $0.90 per share on 4/26/11. The next reporting quarter estimated mean earnings is $1.26 per share. The low estimate is $1.19 and the high is $1.30 per share. The current trailing twelve months P/E ratio is 16.50 (ttm) and the forward P/E ratio is 14.59.

  • Rising revenue year-over-year? Yes, $7.41 for 2010 vs. $6.63 billion for 2009.
  • Rising earnings year-over-year? Yes, $2.10 million for 2010 vs. $1.85 million for 2009.
  • Rising EBITDA year-over-year? Yes, $2.87 million for 2010 vs. $2.26 million for 2009.
  • A dividend yield higher than I can earn in a bank account? Yes, $1.36 is a current yield of 1.75%.
  • Option trading available for the lowest risk entry possible? Yes.

Canadian Pacific Railway Limited (NYSE:CP) is a $11.25 billion market cap company. Canadian Pacific Railway Limited, through its subsidiaries, provides rail and intermodal freight transportation services. It transports bulk commodities, including grain, coal, sulphur, and fertilizers; and merchandise freight that consists of finished vehicles and automotive parts.
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The company was founded in 1881 and is headquartered in Calgary, Canada. CP reported 1st qtr 2011 earnings of $0.21 per share on 4/21/11. The next reporting quarter estimated mean earnings is $1.06 per share. The low estimate is $0.83 and the high is $1.17 per share. The current trailing twelve months P/E ratio is 18.21 (ttm) and the forward P/E ratio is 12.86.

  • Rising revenue year-over-year? Yes, $4.85 for 2010 vs. $4.27 billion for 2009.
  • Rising earnings year-over-year? Yes, $650.7 million for 2010 vs. $550 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $870 million for 2010 vs. $631 million for 2009.
  • A dividend yield higher than I can earn in a bank account? Yes, $1.10 is a current yield of 1.65%.
  • Option trading available for the lowest risk entry possible? Yes.

Kansas City Southern (NYSE:KSU) is a $6.24 billion market cap company. Kansas City Southern, through its subsidiaries, engages primarily in the freight rail transportation business. It operates north/south rail between Kansas City, Missouri, and various ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi, and Texas in the midwest and southeast regions of the United States.

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Kansas City Southern was founded in 1962 and is based in Kansas City, Missouri. KSU reported 1st qtr 2011 earnings of $0.58 per share on 4/21/11. The next reporting quarter estimated mean earnings is $0.69 per share. The low estimate is $0.61 and the high is $0.73 per share. The current trailing twelve months P/E ratio is 29.85 (ttm) and the forward P/E ratio is 16.86.

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  • Rising revenue year-over-year? Yes, $1.81 for 2010 vs. $1.48 billion for 2009.
  • Rising earnings year-over-year? Yes, $180.2 million for 2010 vs. $67.1 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $289.2 million for 2010 vs. $102.2 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

Two related companies that appear to be riding the coat-tails of the railroads:

American Railcar Industries (NASDAQ:ARII) is a $570.53 million market cap company. American Railcar Industries, Inc. designs, manufactures, and markets hopper and tank railcars in North America. It operates in two segments: Manufacturing Operations and Railcar Services.


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The company was founded in 1988 and is headquartered in St. Charles, Missouri. As of January 15, 2010, American Railcar Industries operates as a subsidiary of Icahn Enterprises, L.P. ARII reported 1st qtr 2011 earnings of $-0.25 per share on 4/27/11. The next reporting quarter estimated mean earnings is $0.04 per share. The low estimate is $0.04 and the high is $0.04 per share. The current trailing twelve months P/E ratio is N/A (ttm) and the forward P/E ratio is 24.74.

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  • Rising revenue year-over-year? No, $273.56 for 2010 vs. $423.43 million for 2009.
  • Rising earnings year-over-year? No, $-27.01 million for 2010 vs. $15.46 million for 2009.

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  • Rising EBITDA year-over-year? No, $-41.8 million for 2010 vs. $22.03 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

Trinity Industries Inc. (NYSE:TRN) is a $2.73 billion market cap company. Trinity Industries, Inc., through its subsidiaries, provides various products and services for the industrial, energy, transportation, and construction sectors primarily in the United States. Its Rail group manufactures and sells railcars and component parts, such as auto carrier cars, box cars, gondola cars, hopper cars, intermodal cars, specialty cars, and tank cars.

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The company was founded in 1933 and is headquartered in Dallas, Texas. TRN reported 1st qtr 2011 earnings of $0.30 per share on 4/27/11. The next reporting quarter estimated mean earnings is $0.36 per share. The low estimate is $0.32 and the high is $0.40 per share. The current trailing twelve months P/E ratio is 30.38 (ttm) and the forward P/E ratio is 14.56.

  • Rising revenue year-over-year? No, $2.18 for 2010 vs. $2.57 billion for 2009.
  • Rising earnings year-over-year? Yes, $67.6 million for 2010 vs. $-137.5 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $116.5 million for 2010 vs. $-146.9 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0.32 is a current yield of 0.912%.
  • Option trading available for the lowest risk entry possible? Yes.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NSC, RA, GWR, UNP, CNI, CP, KSU, ARII, TRN over the next 72 hours.