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If you want a strong, steady performer, railroads stocks are a good place to look. Railroads have been steadily recovering from the recession as more manufacturers are shipping more goods. This recovery is currently forecast to continue. For Union Pacific (NYSE:UNP) the “total average revenue per car” was $2,045 in Q2 2011. This was up from $1,941 in Q1 2011. Q2’s result was a 12.7% increase year over year.

More expensive oil is making railroad shipment relatively cheaper compared to trucking. Intermodal (trucking and rail) transportation is forecast to increase 6.6% per year through 2016 (and almost as fast for the five years after that). Coal exports, which almost all go by train to ports, are supposed to increase by 18% in 2011 to 96.1M short tons. I note that coal already comprises 44% of all commodity group products shipped by rail in the U.S. In addition, many expect U.S. coal miners to make up the shortfall caused by offline Australian mines. These shutdowns are due to the inclement weather at the end of last year.

China’s and India’s demand for coal is increasing rapidly. They both need to produce a lot of electricity and need steel to grow. Indonesia is considering curbing its coal exports starting in 2014 in order to have enough to allow itself to continue growing rapidly. All this paints a very rosy picture for railroads for the future.

As for right now, both CSX Corp. (NYSE:CSX) and Union Pacific Corp. have already reported Q2 earnings. Each beat estimates slightly. Each grew revenues. When Norfolk Southern Corp (NYSE:NSC) reports on Tuesday July 26, 2011, I expect to see more of the same. The monopoly nature of these businesses almost guarantees that they will prosper in an environment of steadily increasing energy prices. In this case logic is not being defied. The table below holds some of the fundamental financial data for these companies. It tells the steady growth story. The data are from TDameritrade and Yahoo Finance.

Stock

NSC

UNP

CSX

Price

$76.21

$103.80

$25.38

1 yr. Analysts Target Price

$81.73

$115.59

$29.54

PE

18.03

17.84

17.50

FPE

13.44

13.24

12.38

Avg. Analysts’ Opinion

2.1

1.8

1.9

Price/Book

2.54

2.78

3.11

Price/Cash Flow

11.26

11.25

10.11

FY2011 EPS Growth Estimate

23.40%

18.10%

28.90%

FY2012 EPS Growth Estimate

15.50%

20.10%

17.80%

5 yr. EPS Growth Estimate per annum

14.59%

17.37%

15.96%

Market Cap

$26.92B

$50.92B

$27.99B

Enterprise Value

$33.18B

$58.86B

$35.54B

Beta

1.08

1.13

1.29

Short Interest as a % of Float

1.04%

1.08%

1.10%

Cash per Share (mrq)

$1.38

$2.54

$0.54

Total Debt/Total Capital (mrq)

38.43%

32.81%

49.26%

Quick Ratio (mrq)

1.05

--

1.09

Interest Coverage (mrq)

5.36

9.41

6.96

Return on Equity (ttm)

14.72%

16.71%

19.94

EPS Growth (mrq)

32.54%

13.57%

27.75%

EPS Growth (ttm)

42.57%

33.22%

39.11%

Revenue Growth (mrq)

17.07%

16.16%

13.37%

Revenue Growth (ttm)

19.77%

16.66%

15.86%

Annual Dividend Rate

$1.60

$1.90

$0.48

Gross Profit Margin (ttm)

27.49%

71.23%

65.26%

Operating Profit Margin (ttm)

27.49%

28.83%

29.78%

Net Profit Margin (ttm)

15.80%

16.39%

15.42%

These stocks all look good. Some look better than others in certain areas. The five-year EPS Growth Estimate per annum is roughly 15%, 16% and 17% for the above three stocks, respectively. This is strong, steady growth. The fundamental macroeconomic factors cited above tend to support it as “real." Other data are strong too. The book values are good, but are likely far understated. The railroad lands/track beds have been in existence for years. They would be extremely expensive to try to duplicate. Such a duplication for any one of the above companies would far exceed the stated book value (by many multiples). These companies' holdings could not be easily duplicated in this day and age.

Let’s look at the two-year charts to help technically assess an investment at this time.

The two year chart of NSC:

Click to enlarge

 

The two year chart of UNP:

Click to enlarge

 

The two year chart of CSX:

Click to enlarge

 

As you can see from these charts, all of these stocks have good uptrends, although CSX and to a lesser extent UNP recently have been in a consolidation pattern. Only NSC is approaching overbought levels. The others can really be bought any time. One thing to note is that these stocks have rarely gone (or stayed very long) below their 200-day SMA’s in the last two years. This is sure sign of strength. They all should be great long term performers.

The futures are down this morning, Monday July 25, 2011. Moody’s just downgraded Greek credit three notches to Ca. Also, the U.S. Congress still has not passed legislation to raise the debt ceiling (and to cut the federal budget). The prospect of a U.S. default and continued profligate U.S. federal spending is roiling the markets. This may continue all week.

The Initial claims number will be watched closely. Ditto for the durable goods number and the Q2 GDP number. The automakers and many S&P 500 companies report this week. Earnings should have a strong impact on the markets. Earnings have been generally good so far. Still if we haven’t seen a solid proposal for a debt agreement by Friday, we could see a strong sell off.

With all of the above as a background, you may wish to wait on an investment in railroads. They will go down if the market does. Alternatively you could use one of the following strategies:

1. You can average in in NSC, CSX or UNP. They are all good stocks.

2. You can wait until Tuesday. Then you can buy NSC stock before it reports earnings in the afternoon. A second option would be to sell an out of the money NSC August put option. If the stock goes down, you will at least get it at a lower price. If the stock goes up, that will decrease the value of the put you have sold (I.e. it will make you money). You could try this strategy on UNP and CSX too.

3. Do No. 2 above, except use the proceeds of the put sale to help you buy a call option. This can be either a near term or a longer dated call option or call option bull spread as you prefer. This is a bit more daring, but NSC does seem likely to beat.

Source: Strong, Steady Railroads Will Take You Where You Want to Go