Canadian National Railway (USA) (CNI), Union Pacific Corporation (UNP), United Parcel Service, Inc. (UPS): Invest in 3 ‘Quality’ Transportation Companies

In the long run, the company is expected to achieve an operating ratio of 65% by focusing on price gains and cost efficiency. This could help the company to make an incremental EPS of $12, 45% more than current levels.

United Parcel’s cash generation makes solid case for higher multiple

United Parcel Service, Inc. (NYSE:UPS)’s integrated business model is the global standard for package operators. The company generates some of the highest financial returns within the industrial universe and arguably has a lower beta (+3% vs. S&P). United Parcel’s cash flow profile suggests the shares are relatively attractive within a broader industrial universe.

United Parcel Service, Inc. (NYSE:UPS) and other integrators face challenges in a slow growth global economy as supply chains focus on cost containment and shipment urgency decreases. However, unlike others, United Parcel Service, Inc. (NYSE:UPS) has nonetheless been able to drive slight earnings expansion in this period. UPS’s conservative capital management and higher network profitability are likely to aid the company’s shares over the near-term. Moreover, given that United Parcel Service, Inc. (NYSE:UPS) is trading at a discount to the industry, 8-11% capital appreciation is possible in the case of multiple expansion.

Canadian National: consistent results should alleviate near-term pressure

Canadian National Railway (USA) (NYSE:CNI)’s market valuation suffered from recent operational challenges, but with industry-leading returns, investors are expected to come back to the story as the year progresses. Historically, returns generated at Canadian National were a bit more cyclical, but through the last cycle the company has benefited from cost improvements, favorable end markets and pricing gains that lead us to believe that higher returns may be here to stay.

Moreover, cash flow levels have risen and seem to be steady at these higher levels reflecting Canadian National Railway (USA) (NYSE:CNI)’s dominant position within respective markets. Managements’ capital spending has also translated to higher profitability and shareholders are being rewarded with high cash distributions.

Lastly, the company is expected to demonstrate a meaningful shift in the return profile. Lower equity risk profiles should translate to a richer valuation over the passage of time.

Final word

On the basis of capital returns, cash flows generation and annual earnings growth, Union Pacific Corporation (NYSE:UNP), Canadian National Railway (USA) (NYSE:CNI)  and United Parcel Service seem to be the best companies in the transportation space.

Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway and United Parcel Service.

The article Invest in 3 ‘Quality’ Transportation Companies originally appeared on Fool.com.

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