After spiking to a year-to-date gain of almost 60% in May, U.S. railroad stocks have been falling. This is due in part to the massive flooding in the Midwest, which is disrupting rail traffic.
Several companies have warned that second-quarter profits will be coming in lower because of flood-related damage and a surge in fuel costs.
But the flooding also has wiped out sizable parts of the corn and soybean harvest. The USDA is forecasting a 10-per-cent decline in corn production. This means less business for railways in the affected areas throughout the third quarter.
Shares of Genesee & Wyoming Inc. (NYSE: GWR) had been up over 70% since January and beat far larger competitor CSX by 10%. But the stock has retraced 15% from its recent high at $42.54. (Click here to view the video.)
The company operates in 27 states in the United States, four Australian states, and two Canadian provinces, and serves 12 United States and five Australian ports. It also performs contract coal loading and railcar switching for industrial customers.
In early June, Genesee & Wyoming Inc. completed its acquisition of CAGY Industries for $78.4 million in cash, the parent company of three short line railroads in Mississippi, Georgia, Tennessee, and Alabama.
Same-railroad traffic in May 2008 fell 5 percent compared with May 2007, based on lower lumber and metals shipments.
But this company’s strength lies in it diversification. While damage to its Midwestern lines may depress its share price in the short and medium term, I think U.S.-based revenue shortfalls will be more than offset by increases in Australian farm and food product shipments.
Buy GWR below $35 a share with a target of $45 by year-end.