By Robert Gordon
Railroad companies are often viewed as a proxy for the American economy. So Warren Buffett said when his company, Berkshire Hathaway (BRK.A) acquired Burlington Northern Santa Fe Railroad in 2010. But back in the 1970s, most of this country's 40 rail companies were in or near bankruptcy. In 1980 broad railroad deregulation passed, and now we have four railroads, which combined have over a 90% market share, and railroad customers who complain that the rail industry has devolved into a cartel. Many of these companies are having very good years, but they are all cyclical. I will look at the rail companies in the United States and Canada to look for values. Here is my actionable analysis:
Union Pacific Corporation (UNP) is listed on the NYSE, and was trading recently at about $102 per share, near the high end of its 52 week range of from $107.89 to $77.73. It has a market capitalization of about $49.3 billion, and a P/E of 16.2. It recently raised its dividend by 26% to an annual rate of $2.40, for a yield of 2.4%.
UNP wrapped up a stellar third quarter to 2011. Compared to the same quarter of 2010, revenue was up 18% to $2.9 billion, and profits were up 25% to $554 million, or $1.59 per share. It marked the second consecutive quarter with revenue and profits that both substantially exceeded analysts' projections.
UNP has over $1.5 billion cash on hand, and a modest debt load for such a capitally intensive business as a national railroad. It currently boasts a 17.4% return on equity, and a 16% profit margin. Like all railroads, it has to balance price increases against the likelihood of legislative or legal intervention. I view UNP as a core long term holding.
Rail America, Inc. (RA) is listed on the NYSE, and was recently trading there for about $14 per share. Its 52-week range is from $17.34 to $11.06, and its market capitalization is about $720 million, It has a P/E of about 19, and currently pays no dividend.
RA is a holding company of smaller railroads, and RA itself is 56% owned by Fortress Investment Group, LLC (FIG). In its third quarter of 2011, RA reported revenues up about 8% from the year ago quarter, and profits up about 12% to $0.17 per share. The fourth quarter comparison will not be so kind, as in the fourth quarter of 2010, RA took a one time credit based on retroactive infrastructure improvement costs. However, RA is unquestionably well positioned as a regional carrier of construction equipment, clean energy turbines, and other heavy industrial applications.
As a smaller railroad company, RA carries both more risks and possible rewards as the larger carriers here. Chief among those benefits is a possible takeover candidate by FIG. Speculative investors should take a close look.
Norfolk Southern Corp. (NSC) is listed on the NYSE, and was trading there recently for about $73 per share, near the top of its 52 week range of from $78.40 to $57.57. It has a market capitalization of about $24.6 billion. It has a P/E of about 14.3, and recently raised its dividend to an annual rate of $1.72 per share, for a yield of 2.4%.
NS is on a roll. It has now achieved double digit earnings growth for five consecutive quarters. In its third quarter of 2011, revenue rose nearly 18% from the year earlier quarter to $2.9 billion, and net profits rose 24.5% to $554 million, or $1.59 per share. Those profit numbers represent an all time record for the third quarter. In addition to its dividend increases for 11 consecutive years, the company is in the midst of a share buyback plan. NSC has the same cyclical and macro economic issues as other railroads, but its recent history suggests long term success is likely. It is a quality railroad for a long term holding.
Canadian National Railway (CNI) is listed on the NYSE, and was trading there recently at about $77 per share. Its 52 week range is from $81.26 to $61.82, and its market capitalization is about $34.6 billion. It has a P/E of 15.5, and recently raised its dividend to $1.27 per share, for a yield of 1.7%.
CNI had an excellent third quarter to 2011. Its net profit, excluding a gain from a one time asset sale, was up 16% to $1.38 per share. It has the best margins and returns of any large railroad in North America, and has excellent future prospects in coal and Canadian oil sands.
CNI has raised its dividend, at times aggressively, for 14 years in a row. It is in the midst of a $1.3 billion stock buyback. Yet it trades at a slight discount to competitors Canadian Pacific Railway (CP) and UPC. If one wants to get involved in the Canadian infrastructure, it is hard for me to see a better investment than CNI.
CSX Corp. (CSX) is listed on the NYSE, and was recently trading there for about $22 per share. Its 52 week range is from $27.06 to $17.69. It has a market capitalization of about $22.7 billion, and a P/E of 13.3. It currently pays an annual dividend of $0.48, for a yield of 2.2%.
Like others in this report, CSX has an excellent third quarter. Its earnings were up 19% from the year earlier quarter with $464 million, or $0.43 per share. These numbers represented all time records for the quarter. CSX has spent nearly $5 billion buying back stock in recent years, and has raised its dividend eight times in the last five years. Clearly, this company has investors in mind.
CSX is well positioned in fossil fuel transportation for the next several years at least, and is a leader in “multi modal” transportation, which combines rail, truck, and or shipping to accommodate all customers needs. I believe CSX has a bright future.