In addition to that, railroad companies have a solid trajectory of regular dividend increases over the last decade, and this should be a source of additional returns for investors.
Individual Names
Canadian National Railway (USA) (NYSE:CNI)’s railway spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico; this top notch operator is the envy of the industry when it comes to profitability. The company has considerable exposure to forestry products, around 20% of sales, and this should be a positive factor if the housing recovery continues on its way. Not the cheapest one in terms of valuation, but one of the best companies in the sector.
Canadian Pacific operates on nearly 14,800 miles of track across most of Canada and in the Midwestern and Northeastern United States. The company is heavily focused on intermodal and it´s in the midst of a big shakeout with activist investor Pershing Square pressing for changes in management in order to increase those subpar levels of profitability.
A new board of directors and a new CEO were appointed last year because of those pressures. Hunter Harrison, the new CEO, has a promising pedigree as the ex-CEO of Canadian National, so he deserves some credit. Canadian Pacific could be a nice turnaround play if the new management team leaves up to expectations.
CSX´s transportation network spans approximately 21,000 miles, with service to 23 Eastern states and the District of Columbia, and connects to over 240 short line and regional railroads and more than 70 ocean, river, and lake ports. The stock is cheap, but the company makes 38% of volume from local coal demand, which has been declining due to higher natural gas usage, so prospects don´t look very exciting in the middle term.
Norfolk operates 21,000 miles of track in the Eastern United States region, the company hauls shipments of coal (26% of consolidated revenue), intermodal traffic (20%), and a diverse mix of automobile, agriculture, metal, chemical, and forest products (each 7% to 13%). Coal exposure is considerable, but not as big as in the case of CSX. Besides, it has the highest dividend yield in the group.
Union Pacific Corporation (NYSE:UNP) is the largest public railroaded in the US, operating on 32,000 miles of track in the Western region. The company also owns 25% of Mexican railroad Ferromex and generates around 10% of sales from freight between the U.S. and Mexico. The coal that Union Pacific Corporation (NYSE:UNP) hauls from the Powder River Basin is substantially cheaper than coal from other regions, so the company isn´t as exposed to coal substitution by natural gas as other railroads.
Bottom Line
Railroads have rock solid competitive advantages, and they have come a long way in terms of investing for efficiency and profitability. The sector is benefitting from important secular tailwinds, and corporate fundamentals are looking quite strong. The railroad industry is on the right track.
The article 3 Reasons to Invest in Railroads originally appeared on Fool.com is written by Andrés Cardenal.
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