American Railcar Industries, Inc. (ARII), Trinity Industries Inc (TRN): A ‘Backdoor’ Way To Invest In America’s Energy Revolution

The white noise of the Federal Reserve has drowned out the roar of the rail industry. While others argue about the macroeconomic picture, railroads have been chugging along at a steady pace. The Dow Jones Transportation Index has soared 18% this year — the average gain of the top three railroads is 26%.

The U.S. rail market is a $60 billion industry, with more than 140,000 miles of track across the nation. And what’s being moved the most?

Oil. Coal. Chemicals.

Coal alone accounts for 43% of the total tonnage moved by train. Crude oil shipments, trending away from pipelines, spiked 256% in 2012 to 167 million barrels in nearly 234,000 freight cars. By 2016, more than 2.7 million barrels of oil a day is expected to be transported by rail — more than the entire Trans-Alaskan pipeline.

Rail ships oil faster than pipelines — 15 to 20 miles an hour by train compared with 4 to 5 miles an hour by pipeline. It’s also more flexible. The expanse of the rail system — and avoidance of political and regulatory quagmires that plague pipelines — makes shipments by train a more attractive option.

An energy revolution is taking place in America thanks to new technologies in drilling and higher oil prices. With that revolution comes the need for more efficient overland transportation. One company in particular is in the right place at the right time.

Large rail companies stand to profit considerably from the increase in oil and gas market demands and have attracted investors such as Warren Buffett, whose Berkshire Hathaway Inc. (NYSE:BRK.A) acquired BNSF in 2009, and Bill Gates, who owns 12% of Canadian National Railway (USA) (NYSE:CNI), making him its largest shareholder.

A little-known industrial conglomerate that dominates the railcar manufacturing and leasing industry, Trinity Industries Inc (NYSE:TRN) saw net revenue increase 79% last year and boosted its dividend 22%. In its second-quarter earnings report on July 31, Trinity Industries Inc (NYSE:TRN) beat analysts’ estimates with revenue of $1.1 billion, up 7% from the same quarter last year, and profit of $84 million, up nearly 24%.

A stock that stays under the analysts’ radar often proves to be quite a boon for savvy investors who can identify value. Trinity Industries Inc (NYSE:TRN) may have the most inherent opportunity right now because no one’s looking at the numbers.

Trinity Industries Inc (NYSE:TRN)’s main competition, American Railcar Industries, Inc. (NASDAQ:ARII), also recently announced impressive second-quarter earnings and reported heavy investment in its leasing business. Although American Railcar Industries, Inc. (NASDAQ:ARII) has a market share of less than $750 million, it has much the same story as Trinity Industries Inc (NYSE:TRN) and stands to profit from the same catalysts. However, American’s negative free cash flow concerns tied to high capital expenditures make Trinity Industries Inc (NYSE:TRN) the better play for now.