As economic growth slowly awakens from the deep sleep it has been in for the last few years, one industry is poised to take full advantage. Railroad transportation is efficient and fundamentally solid. If you’re looking for a stable, steady dividend with upside potential, the railroad industry may be worth a second look. Please use this list as a starting point for your own research.
CSX Corporation, (CSX) – At the current price of $19.98, CSX is slightly above its yearly low of $17.69 set back in September. Investors began to accumulate shares and push it back into the $20 range but it has since returned to the teens. CSX yields a modest 2.3% which is right in line with competitors Canadian Pacific Railway and Union Pacific. With a P/E ratio of 12.3, it boasts the lowest in the railroad industry- with Norfolk Southern as a close second. As of September 30, CSX still had over $700 million remaining on its stock repurchase plan, which could provide further upside potential in the coming months. Although CSX has an impressive P/E and a stable dividend, overall fear of continued global slowdown is an ongoing concern for the company. If the economy were to take a turn for the worse, it could mean much less coal shipments, which would be a real damper on revenue. Overall, CSX could be poised for significant upside potential if the economy continues to stabilize, but the stock is definitely a longer-term investment.
Kansas City Southern, (KSU) – Kansas City Southern is currently 15% below its yearly high of $70.48 set on November 30 and well off the lows of $45.63 set way back in August. Although Kansas City Southern doesn’t offer a dividend, it continues to take steps to become more competitive in the future. It has been focused on retiring a large portion of its debt prior to maturity in order to recover a large portion of revenue that would have been lost to interest expense. It is also strongly committed to replacing older locomotives with newer, more fuel efficient models. As the price of fuel continues to decline, the benefits may not be too noticeable, but if fuel costs rise in the next several years, the fleet of more efficient cars will be a strong asset. The company is heavily committed to expansion across the Southern border into Mexico and is currently involved in numerous legal battles with the country. It is worth noting that any court ruling against the company could be a significant blow to the share price. With the highest P/E in the industry of 23.64, there are several other better choices for a railroad investment.
Union Pacific Corporation, (UNP) – Union Pacific is currently trading at $98.79, roughly 10% below its yearly high of $107.89 set way back in July. The shares have been steadily rising since bottoming out on the infamous October 4th, 2011 at $77.73. The company provides investors with a solid dividend of 2.4%, identical to competitor CSX Corp. Its P/E of 15.7 is below industry averages but still above its rival CSX Corp. Union Pacific is also a large carrier of coal which could be a weak spot should the global slowdown persist or possibly get worse in the coming year. At 41.19%, the company’s gross margin is well above the industry average and a definite bright spot for the books. If volumes pick up in the coming year and expenses begin to pick up right along with them, it will be interesting to see whether the company can maintain this impressive margin. Union Pacific definitely has pros and cons but the dividend makes it worthwhile if you’re already a shareholder. If you are considering taking a new position, I believe that the current price may not provide much room for upside potential.
Norfolk Southern Corporation, (NSC) – At today’s close of $69.66, Norfolk Southern is about $9 below its yearly high set in July, but is well off the yearly low of $57.57 set on October 4th. As with competitor Kansas City Southern, Norfolk Southern is heavily focused on updating its fleet of locomotives and railcars with more efficient new models. For the long term, this is great news as it proves that the leaders have a sound long term vision. Yet, with the higher health care costs of retiring baby boomers and the strong potential for a wage increase in the new year, Norfolk Southern’s books could be feeling the heat during upcoming earnings announcements. With a 2.4% dividend yield and a P/E of 13.61, Norfolk does offer investors a reason to be patient. One bright spot for Norfolk is the recent expansion and the need for transportation to and from the shale regions in the upper Midwest. As North Dakota’s economy continues to boom, the need for transportation to and from that area has never been greater. With the efficiency of rail transportation, Norfolk could stand to gain some market share from the trucking industry in that area as demand for transportation continues to outpace supply.
Canadian Pacific Railway Limited, (CP) – Canadian Pacific is slightly below its yearly high of $69.92 set back in late January and well off lows of $44.74 set in September. Although Canadian Pacific does offer investors a dividend of 1.9%, it is less then competitors CSX Corp., Union Pacific, and Norfolk Southern. The P/E of 20.31 is well above competitors and the industry average. The company is heavily focused on reducing the debt load over the next year to save on interest expense. As with all the railroads, a slower-than-expected economic recovery could dampen future earnings expectations. Unfortunately, since the company is based in Canada, negative fluctuations in the Canadian dollar will be unfavorable to American investors as well. The same risks are present with Canadian Pacific as with the other railroad company’s mentioned in this article. Rising retiree health care costs and overall pension expenses, plus the possibility of reduced demand for energy shipments raise economic concerns. With similar risks, yet less impressive numbers, there are better opportunities in the railroad industry then Canadian Pacific.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
No comments:
Post a Comment