Canadian National Railway (USA) (CNI), CSX Corporation (CSX), Norfolk Southern Corp. (NSC): Three Stocks to Consider in the Railroad Business

Domestic market: Stock #2

Coal dependence has chipped away profits from CSX Corporation (NYSE:CSX), and management is acting in order to reverse the trend. Aided by the reduction of market competitors, fuel-efficiency initiatives, and internal restructuring, management is returning the company to increasing profits.

CSX Corporation (NYSE:CSX) will benefit from partnerships with government regulators, and state initiatives in Massachusetts, New York, and Florida. Main competitor Norfolk Southern Corp. (NYSE:NSC) lacks that last state. Additionally, increasing terminal capacity, demand for industrial and intermodal segments, upward operating margins and revenues, coupled on cost-reduction policies, will improve financial health. Results are already visible as other segments’ contributions to revenue rise, and exposure to coal’s cyclicality is reduced.

Financially, CSX is very solid. Revenue, net income, and cash flow have been on the rise, and the catalysts mentioned above should sustain the trend. The downside: Debt has been on the rise and is not expected to change since further investment is projected.

Currently trading at 13 times its earnings, a 25% discount to the 17.5 times industry average, and higher yield (2.43%) than Canadian National, CSX is a hold. The stock is relatively cheap, and the price has entered a downtrend, but the firm’s exposure to coal makes it not suitable for a long-term investment, and dividends are small (0.14%).

Bottom line

Railways require heavy investment on capital that cannot be moved easily. Once constructed, routes change very little. I prefer Canadian National because it complements all the other companies, holds a greater potential for a future merger, and is highly competitive.

Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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