As the North American economy recovers, the rail sector has been one of the biggest beneficiaries. The demand for goods to be transported safely and efficiently by the railroads is still unsurpassed. As North America has undergone an energy renaissance, rail remains the fastest and easiest way to move crude oil. As the economies of Canada and the United States continue to recover, look for the rail stocks to continue making new highs.
The Canadian rails
Two Canadian rails have been great performers in the past year. Canadian Pacific Railway Limited (USA) (NYSE:CP) has outperformed Canadian National Railway (USA) (NYSE:CNI) by rising 89% versus 28% for Canadian National. Going forward, I think Canadian National can outperform Canadian Pacific Railway Limited (USA) (NYSE:CP) due to its cheaper valuation. Canadian National Railway (USA) (NYSE:CNI) has a P/E of 17 whereas Canadian Pacific has a P/E of 40. I also like the fact that Canadian National has higher margins than Canadian Pacific Railway Limited (USA) (NYSE:CP).
| Canadian National Railway | Canadian Pacific | |
| Gross Margin | 0.49 | 0.34 |
| Operating Margin | 0.37 | 0.24 |
Canadian Pacific Railway Limited (USA) (NYSE:CP) has performed well, thanks to activist investor Bill Ackman. His Pershing Square Capital is the company’s largest shareholder. In 2012, he launched a proxy fight and was appointed to the company’s board. He was instrumental in bringing in industry veteran Hunter Harrison as CEO. The stock has performed well due to Harrison’s success in turning the company around.
Ackman just announced that he is selling 7 million shares to trim his stake in the railroad. His investment in Canadian Pacific Railway Limited (USA) (NYSE:CP) has tripled in value since he took his position in 2011. He will still remain the largest shareholder in the company, and is just taking some profits on his investment to balance out his portfolio better.
Canadian National Railway (USA) (NYSE:CNI) has been one of the prime beneficiaries of oil sands development in Alberta. The company has rail lines that are at the heart of the Canadian oil sands industry. If the Keystone XL pipeline is rejected in the U.S., Canadian National stands to gain the most because without the pipeline, the only way the oil sands crude can get to the U.S. is on its railways.
Canadian National loves the crude by rail business. Most of that work is long-haul and that is the most profitable segment for the railroads. Canadian National Railway (USA) (NYSE:CNI) can transport oil sands crude from Alberta all the way to Alabama refineries. Whether the Keystone XL pipeline is approved or not, Canadian National Railway (USA) (NYSE:CNI) will benefit because of the tremendous growth in oil sands production. Pipelines don’t get built overnight and production is only increasing in Canada. The pipelines won’t be able to handle all the increased production anyways. Canadian National Railway (USA) (NYSE:CNI) wins either way.
The east coast rails
The two main east coast railways are CSX Corporation (NYSE:CSX) and Norfolk Southern Corp. (NYSE:NSC). Both companies have significant exposure to coal and have under-performed their peers because of coal weakness. As the coal sector looks to rebound, it will bring these two rail stocks with it.
By comparing these two rails, we see that they are very similar.
| CSX | Norfolk Southern | |
| Market Cap | $25.73 billion | $24.28 billion |
| Revenue | $11.75 billion | $10.99 billion |
| EBITDA | $4.55 billion | $3.98 billion |
| Gross Margin | 0.39 | 0.36 |
| Net Income | $1.87 billion | $1.78 billion |
| Operating Margin | 0.30 | 0.28 |
| P/E | 13.92 | 13.87 |
| PEG Ratio | 1.29 | 1.33 |
| Price/Sales | 2.19 | 2.21 |
As you can see, their financial metrics are almost identical. CSX Corporation (NYSE:CSX) operates 21,000 miles of track in 23 states. Norfolk Southern Corp. (NYSE:NSC) has 20,000 miles spread out over 20 states. Both also serve the District of Columbia. Both have had the same performance over the past year, with CSX Corporation (NYSE:CSX) rising almost 24% and Norfolk Southern Corp. (NYSE:NSC) rising 21%.
The west coast rail
The west coast rail to own is Union Pacific Corporation (NYSE:UNP). The other railroad on the west coast is Burlington Northern Santa Fe, which is owned By Warren Buffett’s Berkshire Hathaway. Union Pacific Corporation (NYSE:UNP) is the largest of the publicly-traded railroads with a market cap of almost $73 billion. The company operates over 31,000 miles of track linking the west coast to the gulf coast.
Union Pacific Corporation (NYSE:UNP) has several avenues for growth. For one, it is actively involved in shipping oil from the fast-growing Bakken Shale of North Dakota. Union Pacific sees crude oil shipments by rail rising 40% this year. Five years ago, Union Pacific shipped no oil on its rails. Now, the company ships about 90 million barrels a years. According to CEO Jack Koraleski:
We’ve proved we can move oil two to three times faster than a pipeline, and we’ve proved we can be consistent and reliable. Customers have told me that, if and when they build a pipeline, they’re still going to carve out a piece of their business for rail.
The second avenue for growth is that Union Pacific has plenty of track for goods going in and out of Mexico. Mexico’s manufacturing sector is producing plenty of goods that are shipped to America. There’s no better way to ship than on the railroads and Union Pacific is one of the few that have the track. Union Pacific is able to service all six gateways in Mexico from the U.S. To service the auto industry, Union Pacific typically ships auto parts south to Mexico and returns to the U.S. with automobiles.
Foolish assessment
I really like the rail space. It has high barriers to entry. A company can’t wake up tomorrow and decide to go into the rail business. These five rail stocks have great management, great track location, and are in a prime situation to capitalize on a resurgent economy. If you believes in the long-term future of the U.S., there’s no better sector to be in than the rail space.
The article Continue to Bet on Rail Stocks originally appeared on Fool.com and is written by Mark Yagalla.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Mark 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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