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Railroads – An Eco Investment Stock Play

|Includes: CNI, CSX, Norfolk Southern Corporation (NSC), UNP

When people think of trains, they often picture an engineer shoveling coal into a burner, with black smoke billowing from a tall smokestack. But today’s trains are a far cry from the past. Railroad companies such as Norfolk Southern (NYSE:NSC), CSX Corporation (NYSE:CSX), Union Pacific (NYSE:UNP) and Canadian National Railway (NYSE:CNI) are poised to become one of the greenest ways to transport freight in the future.

Long Term Case for Green Railroads
According to the Association of American Railroads, each freight train can move one ton of freight 457 miles on a single gallon of fuel, efficiency has increased by 94% since 1980, and companies have nearly doubled the amount of freight they can haul using the same amount of fuel.
Transitioning freight to railroads has another advantage – a single train can haul the same volume of freight as nearly 300 trucks, reducing congestion on roads and reducing the need for new highways.

green locomotive railroad stocksNew technologies are reducing the pollutants from locomotives, such as the GenSet Locomotive at CSX which reduces nitrous oxide and particulate matter emissions by 80% and can create carbon dioxide emissions savings of 50% by monitoring engine idling and switching to a “sleep” mode after a period of inactivity.  The company has invested more than $1 billion since 2000 to upgrade its locomotive fleet with technology that reduces fuel consumption and air pollutant emissions. And Norfolk Southern recently unveiled an experimental electric locomotive that relies solely on rechargeable batteries for power.

Not Quite Green – But Getting Closer
There are still hurdles though to calling railroads entirely “green”. First, railroads do not stop at every city, so railroad freight can often travel farther than trucks which can deliver directly. And, the Environmental Protection Agency reports that “Locomotive engines are significant contributors to air pollution in many of our nation’s cities and ports. Although locomotive engines being produced today must meet relatively modest emission requirements set in 1997, they continue to emit large amounts of nitrogen oxides and particulate matter (NYSE:PM), both of which contribute to serious public health problems.”

In 2008, the EPA announce a regulatory program that, by 2030, will reduce annual emissions of nitrogen oxide by about 800,000 tons and diesel particulate matter emissions by 27,000. Hopefully new technologies will transition the fleet to cleaner emissions before that time.

Short Term Railroad Outlook

Investors should also look at the near term case as well. Railroad stocks have been gaining steam since the market turnaround, with even more interest last year when Warren Buffett acquired Burlington Northern. These stocks also helped push the PowerShares Global Progressive Transportation Portfolio ETF (PTRP) to a 50.05% gain last year.

Last month, JP Morgan and other analysts raised their 12 month price targets for Norfolk Southern, CSX Corp and Union Pacific. Much of their current rationale comes from a reviving economic outlook and increasing freight volumes.

Further Funding for Rail Projects
Companies will also likely benefit from President Obama’s stimulus package which included $8 billion for high-speed passenger rail projects across the country. Also, the California High-Speed Rail project was approved by California voters in 2008  authorizing $9.95 billion in general obligation bonds for the project. The National Gateway – expected to cost $842 million – is a plan to create a more efficient rail route linking Mid-Atlantic ports with Midwestern markets.

Railroad stocks offer an interesting play for the both the short term investor looking for immediate returns, and long term investor looking to invest in a sector that may be one of the key drivers of the green economy.

Disclosure: None