One of the hottest sectors in the stock market is the railroad sector. Railroad companies primarily earn revenues by hauling freight, which they can do for less than other types of freight companies. Railroad companies have also benefited from an improving economy for freight transport. This article will examine four railroad companies to see if they could help your portfolio.
Norfolk Southern Corporation (NSC) Norfolk Southern has a market cap of $24.46 billion with a price to earnings ratio of 14.21. The stock has traded in a 52 week range between $57.57 and $78.40. The stock is currently trading around $73. In the third quarter, the company reported revenues of $2.9 billion compared to revenues of $2.4 billion in the third quarter of 2010. Third quarter net income was $554 million compared to net income of $445 million in the third quarter of 2010.
One of Norfolk Southern’s competitors is the Burlington Northern Santa Fe LLC. Burlington Northern is Berkshire's (BRK.B, BRK.A) privately-held transportation giant.
Norfolk Southern is a railroad company that freights raw materials and other products in the Southeast and Midwest portions of the United States. The company had a strong third quarter in which it increased its year-over-year revenues by 20% and its net income 24%. The company posted third quarter earnings per share of $1.59, which blew away analyst estimates of $1.41 per share. The company’s highway conversion (Piggyback) earnings increased by 8%, and could go higher because of tight trucking capacity. In other bullish 2011 news, the company bought back $1.6 billion of its stock, and increased its dividend two times by 19%. The current dividend is $1.72 with a 2.4% yield. As predicted, the stock has performed well and is up by 15.9% over the last 52 weeks. I believe that Norfolk Southern will benefit from the improving economy, and that its investors can look forward to further stock appreciation and a growing dividend.
Union Pacific Corporation (UNP) Union Pacific has a market cap of $50.98 billion, with a price to earnings ratio of 16.77. The stock has traded in a 52 week range between $77.73 and $107.89. The stock is currently trading near the top of its 52 week range at around $106. The company reported third quarter revenues of $5.1 billion, compared to revenues of $4.4 billion in the third quarter of 2010. Third quarter net income was $904 million compared to net income of $778 million in the third quarter of 2010.
One of Union Pacific’s competitors is the Canadian National Railway Corporation (CNI). Canadian National is currently trading around $77 with a market cap of $34.25 billion and a price to earnings ratio of 15.22. Canadian National pays a dividend which yields 1.7% versus Union Pacific whose dividend yields 2.3%.
Union Pacific is a freight transportation company that operates in the Midwest and Eastern United States. Union Pacific is another railroad company that is benefitting from the improving economy. In the third quarter, the company increased its year-over-year revenues by 16% and its net income by 16%. The company’s stock performance has been excellent. The stock price is up by 14.7% over the last 52 weeks and 138% over the last three years.
In spite of the run up in the stock price, the company’s valuations (price to earnings ratio 16.77/price to book ratio 2.75) are still reasonable. The company has been able to increase its highway conversion business because high fuel prices make it hard for truckers to compete. CNBC stock analyst Jim Cramer said that Union Pacific "Had the best quarter of all the rails...you are in good hands. They are doing a lot of business in the Bakken. I think it is a terrific stock." I think Jim Cramer is right.
Kansas City Southern (KSU) Kansas City Southern has a market cap of $7.45 billion with a price to earnings ratio of 25.76. The stock has traded in a 52 week range between $45.63 and $70.48. The stock is currently trading around $68. The company reported third quarter revenues of $544 million compared to revenues of $438 million in the third quarter of 2010. Third quarter net income was $99 million, compared to net income of $53 million in the third quarter of 2010.
One of Kansas City Southern’s competitors is a Mexican railroad company named Grupo Carso SAB de CV (GPOVF.PK). Grupo Carso is currently trading around $2.35 with a market cap of $2.71 billion and a price to earnings ratio of 7.37. Neither Grupo Carso nor Kansas City Southern pays a dividend.
Kansas City Southern offers commuter and freight services. The company has done a great job of increasing earnings. In the third quarter, the company increased year-over-year third quarter revenues by 24% and net income by 88%. The company’s third quarter earnings increase was not an aberration, because in 2010 the company increased its year-over-year net income by 168%. The company’s rapid earnings growth has helped the stock price, which is up by 41% over the last 52 weeks and 267% over the last three years. The company, which has operations in Mexico, is involved in legal battles with the Mexican government that could affect future earnings. Also, the company’s valuations are higher than its competitors. If I were to buy a railroad stock, I would prefer to invest in Union Pacific or Norfolk Southern, which pay dividends and trade at lower multiples.
CSX Corporation (CSX) CSX has a market cap of $22.57 billion with a price to earnings ratio of 13.26. The stock has traded in a 52 week range between $17.68 and $27.06. The stock is currently trading around $21. The company reported third quarter revenues of $2.9 billion, compared to revenues of $2.6 billion in the third quarter of 2010. Third quarter net income was $464 million compared to net income of $414 million in the third quarter of 2010.
One of CSX’s competitors is Canadian Pacific (CP). Canadian Pacific is currently trading around $65 with a market cap of $11.03 billion and a price to earnings ratio of 21.17. Canadian Pacific pays a dividend which yields 1.8%, versus CSX, whose dividend yields 2.2%.
CSX offers railway freight services in 23 states east of the Mississippi and in Ontario, Canada. The company increased its year-over-year revenues by 11% and its net income by 12%. CSX is hard to compare to its competitors. That is because its earnings are growing slower than its competitors, but its margins are better. Its gross margin of 38.08% and its operating margin of 29.5% are higher than the industry averages. Also, the valuations (price to earnings ratio 13.26/price to book ratio 2.71) are lower than its competitors. The company’s dividend of $0.48 with a 2.2 % yield is in line with Union Pacific and Norfolk Southern. CSX’s freight business can also benefit from high fuel cost, because railroads can ship a ton of freight at a much lower fuel cost than the trucking companies it competes against. CSX will also benefit if the economy improves. Investors that are interested in railway companies should do further research and make their own comparisons.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
