As we approach the 150th anniversary of The Pacific Railway Act this July, I will take this opportunity to analyze five railroad stocks. I will discuss their place within an industry that outperforms the broad market, and show how these five stocks will benefit from the current level of crude oil prices. I chose these stocks because they serve as an excellent starting point for an analysis of the railroad industry.
Historically, it's hard to beat the blessing of Abraham Lincoln who practically christened Union Pacific (UNP) himself by passing The Pacific Railway Act in 1862. Union Pacific is capitalizing on this outstanding endorsement in the marketing for its anniversary as well as emphasizing its "American as apple pie" appeal when chairman and CEO Jim Young stated that the company was "looking to invest in America's transportation infrastructure so taxpayer's don't have to." I think Union Pacific's message will only serve to strengthen its lead position in the industry as we head closer to the presidential election. Its pledges of patriotism in helping U.S. companies compete globally as well as announcing the expectation to hire 4,000 to 4,500 employees in the coming year will, in my opinion, help combat any negative public sentiment over its recent settlement with the EPA for $1.5 million for eight separate spills in Colorado, Wyoming and Utah between 2003 and 2004.
I think that Canadian National Railway (CNI) is poised to pounce on Union Pacific's misfortune, though, with its claims of being environmentally friendly for shipping crude oil by rail, thereby emitting the least greenhouse gases of any other transport method. By promoting itself as a green company, I believe it can attract more investors who may have previously sat out on any stocks with the faintest whiff of pollution on its hands. Canadian National Railway is also planning to invest $100 million to expand operations in North Dakota through 2012 to increase rail capacity and upgrade track and equipment which will bode well for its apple pie appeal as well as show signs of optimism for the future. Always promising for investors, in my opinion. The biggest drawback to long-term investing in this solid position is its relatively low dividend yield at 1.9% compared to Virginia based Norfolk Southern Corp (NSC) knocking out 2.6%.
Virginia-based Norfolk Southern ships primarily coal in the Southeast, East, and Midwest. With net revenue of $480 million placing it smack dab in the middle of the industry range while still trading at the relatively high price of $72 per share, I think Norfolk Southern will have to find a way to distinguish itself from the others in the pack. It has recently unveiled plans for a rail line connecting Columbus to Cincinnati thereby opening up the Ohio Valley to its East Coast container ports. This would be a huge advantage to the company's market share in the future, providing it with a much-needed leg up as forecasters are predicting a steep drop in coal demand in the near future.
Norfolk Southern's biggest competitor is CSX Corp (CSX) which covers most of the same territory. I believe that CSX has the advantage in its greater diversification of transported commodities: crushed stone, sand, gravel, metal phosphate, fertilizer, food, consumer agriculture, paper and chemical products. It's also trading at about $22 per share, compared to the princely price of around $111 per share for Union Pacific or even $72 per share of its closest rival Norfolk Southern, so I find it to have terrific bargain basement appeal for any investors looking to get in on the railroad action. CSX also pays out a respectable 2.2% dividend.
The price of CSX's stock did fall upon its recent earnings announcement that showed little growth in the long term. Its total revenue last quarter was only 4.79% higher at $2.95 billion than the year earlier period's revenue of $2.82 billion. However, CSX's earnings per share have grown strongly at the annualized rate of 34.12% and its operating margin of 29.11% surpassed the industry average of 21.12% by 16.67%. I believe this company could very well be the little engine that could.
Kansas City Southern (KSU), founded in 1887 and based out of Kansas City, had a 10.80% increase in earnings, jumping from $478.60 million in the year earlier period to $530.30 million in total revenue last quarter. It's also worth noting that Kansas City Southern was able to achieve the herculean task of reducing its total debt as a percentage of total capital from 40.28% last year to 39.08% in its last quarter while at the same time managing to increase its available cash from $107.40 million to $217.10 million. That's an outstanding growth of 102.14%. It can also be boastful of its extensive trade routes to Mexico, a fact that can set it apart from its competitors. My biggest gripe with investing in this stock is it failure to pay a dividend, which it hasn't since 2007. A definite downside for any serious long-term investor.