Transportation and Automotive Sector Ideas

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Railroad Sector -- >>> Which Is the Best of the Railroads?



By Robert Ciura

May 3, 2013



http://beta.fool.com/rciura/2013/05/03/which-is-the-best-of-the-railroads/33181/?source=eogyholnk0000001



Railroads are often seen as a bellwether for the broader economy because of the amount of retail and manufactured goods they transport across the nation. Norfolk Southern (NYSE: NSC) operates approximately 20,000 route miles in 22 states and serves every major container port in the eastern United States. CSX (NYSE: CSX) serves major markets in the eastern United States and has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. Major competitor Union Pacific (NYSE: UNP) operates a rail network including 31,000 route miles.

The railroad industry counts Warren Buffett, one of the world’s most famous investors of all time, as a fan. Buffett is a well-known railroad enthusiast and proved it when his Berkshire Hathaway bought Burlington Northern Santa Fe, then the nation’s second-largest railroad, for $34 billion in 2009. Should you follow his advice and add one of the nation’s biggest railroads to your portfolio?

The railroads keep chugging along

Norfolk Southern admirably navigated a tough environment last year, reporting 2012 revenue and earnings per share declined 1% year over year. More positively, the company increased its dividend more than 18% last year, and still carries a very comfortable 30% payout ratio.

Thankfully, Norfolk Southern is off to a solid start in 2013. The company reported 15% growth in diluted earnings per share during the first three months of the year thanks to 3% growth in shipment volumes.

CSX struggled during fiscal 2012, as the company was only able to eke out a tiny increase in revenue versus the prior year. In addition, the company reported 7% diluted earnings per share growth for 2012 year over year.

Like Norfolk Southern, CSX kept its head above water last year and fortunately improved measurably during the first quarter. Over the first three months, revenue remained flat, but CSX posted record operating income and earnings per share. In addition, CSX provided investors with a 7% dividend increase.

Union Pacific managed to impressively reverse the pattern of railroads reporting disappointing 2012 results, with last year being the most profitable year in the company’s 150-year history. Union Pacific reported full-year diluted earnings per share of $8.27, an increase of 23% year over year.

Furthermore, Union Pacific’s record results extended into the first quarter of 2013. The company’s diluted earnings per share represented another record, growing 13% year over year. Also, operating revenue grew 3%, also a new record.

The bottom line

The railroads serve a vital purpose that the very health of our country depends on. Railroads are more energy-efficient than trucks, since they use much less fuel, and can carry hazardous materials not allowed on highways. It’s true that the last year has not been kind to most of the nation’s biggest railroad companies, due to the sluggish economic recovery in the United States in conjunction with a reduction in coal shipments.

However, it’s worth repeating that the recovery in the U.S., while painfully slow, continues. In addition, the drop in coal shipments should abate somewhat as the rising price of natural gas will make coal more attractive to domestic utility customers.

Specifically, Union Pacific sports higher growth than its competitors but investors are paying a higher valuation for this growth. Union Pacific trades at a trailing price-to-earnings ratio in excess of 17, compared with P/E ratios of 13 and 14 for CSX and Norfolk Southern, respectively.

The Foolish takeaway here is that the railroads are well-run businesses that should continue to perform strongly, demonstrated by their recent quarterly results and solid dividend yields between 2% and 3% annualized. All three of these railroads are great businesses that will likely earn shareholders solid returns for many years to come.


With 21,000 miles of track serving two-thirds of the U.S. population, CSX maintains a valuable proprietary asset. Still, this railroad will face difficult obstacles in the years ahead due to a domestic surplus of natural gas and coal’s declining popularity. To help investors better understand how CSX can deal with these challenges, The Motley Fool has released a brand-new premium research report authored by Isaac Pino, Industrials Bureau Chief and transportation expert. Isaac provides an in-depth look at CSX’s competitive advantages, risk areas, and prospects for the future.

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