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The consensus on railroads is that they are experiencing strong operational growth, despite lower coal volumes. Union Pacific Corporation (UNP), CSX Corporation (CSX), and Kansas City Southern (KSU) have recently reported positive earnings for Q2 2012. This is welcome news for railroad investors who may have some concerns regarding the impact of decreased coal volume.

Here's a look at the railroads that have already reported Q2 earnings:

Q2 2012 vs. Q2 2011

Union Pacific

CSX

Kansas City Southern

Revenue Growth

7.5%

-0.20%

1.9%

Earnings Growth

27.6%

1.2%

70.1%

The three railroad companies who reported last week have all beat earnings estimates for the quarter. It is encouraging to know that the railroads can thrive without the higher coal volume of past years.

Let's take a look at what products drove growth this past quarter:

Products Transported

Union Pacific

CSX

Kansas City Southern

Automotive

+15%

+6%

+15%

Chemicals

+ 12%

+6%

-7%

Industrial

+6%

+6%

+10%

Intermodal

+3%

+10%

+23%

Agriculture

-2%

+6%

-7%

Coal

-17%

-14%

-12%

Note: CSX lumps automotive, chemicals, industrial, and agriculture under the merchandise category - which increased 6% in Q2 2012. Therefore, I listed 6% for each individual type of merchandise.

We can see from the chart that each railroad has its individual strength. All of them experienced growth in automotive, industrial, and intermodal and all of them took a hit on coal. The growth in the stronger categories outweighed the weakness in coal. The strength in automotive, intermodal, industrial, etc. is encouraging not only for the railroads, but also for the economy. This shows that there is tangible evidence that the wheels of the economy are continuing to roll forward.

The performance of UNP, CSX, and KSU should be a general predictor of how well Norfolk Southern (NSC) performed in Q2. Norfolk reports earnings this week on Tuesday July 24 and is expected to achieve EPS of $1.53. The company beat expectations in its last four quarters.

Here are a few more noteworthy statistics for the railroads:

Union Pacific

CSX

Kansas City Southern

Norfolk Southern

Dividend

2%

2.5%

1.1%

2.5%

Forward PE

12.66

10.81

17.18

11.09

PEG

0.99

0.99

1.32

0.91

Operating

Cash Flow

$6.01 B

$3.2 B

$679.2 M

$3.61 B

Free Cash Flow

$1.82 B

369.12 M

- $65.31 M

$789.75 M

5Yr. Annual

Expected Earnings

Growth

14.96%

12.5%

15.88%

13.76%

The railroads should all thrive for the long term. Although coal shipments may remain weak in the near term, evidence shows that the other transportable categories are performing well and picking up the slack. This is a good feature for these companies. They are not dependent on just one commodity or product. Rather, they are diversified among six primary categories of products.

I like to look at a combination of dividends and expected earnings growth to gauge approximately how well future investment returns will materialize over time. The railroads are poised to perform better than the overall market. They should be considered to be a part of a balanced market-beating portfolio.

Source: Railroads Showing Resiliency In This Challenging Environment