Are Railroad Stocks Overpriced? – Canadian Pacific Railway Limited (USA) (CP), Union Pacific Corporation (UNP)

While grain and coal shipments are down, crude shipments have seen explosive growth.

UP, CN, Canadian Pacific Railway Limited (USA) (NYSE:CP) and BNSF have invested billions of dollars in track and infrastructure in the Bakken Region in North Dakota, Montana and Saskatchewan. Railroads haul in c
arloads of fracking sand and drilling pipe used to build wells. They haul out crude oil to refineries and other end users thousands of miles away in the Gulf Coast. Railroads haul crude and freight substantially cheaper than trucks, especially over long distances.

US railroads will spend $24.5 billion on its rail network this year, including $13 billion to increase capacity, according to
The Association of American Railroads
.
The freight railroads also estimate they will hire more than 11,000 employees this year, primarily in response to attrition and retirements from the industry’s aging workforce, AAR said.

UP, the largest railroad in the United States, increased its
revenues 7% in 2012 over 2011. Its earnings per share rose 23% to $8.27 per share. Argus Research raised its target price for UP to $148, from $140 per share. UP will likely split its shares once it gets to $150 per share — which was the stock price at which the last split occurred in May 2008.

Standard & Poor’s on Feb. 16 raised its 12-month target price for CN to $107 per share, saying earnings will grow 12% in 2013, after rising 11.8% in 2012. S&P considers CN “to be the most efficiently run of the major North American railroads.”

I believe those efficiencies were created in part by its former CEO E. Hunter Harrison, who left CN in great shape when he retired three years ago. Harrison made some strides in cutting expenses and improving revenues, but the company still has a long way to go.

Since CN is the largest railroad in Canada, and Union Pacific Corporation (NYSE:UNP) claims the top spot in the U.S., I expect CN’s and UP’s volumes to increase based on improving economic conditions in Canada and the United States.

It’s hard to beat the largest railroads in North America. CN and Union Pacific Corporation (NYSE:UNP) have excellent operating efficiencies and strong growth opportunities in the energy sector, which might make them superior long-term investments.

The article Are Railroad Stocks Overpriced? originally appeared on Fool.com and is written by Michael Hooper.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.