With about 21,000 miles of rail, CSX runs the largest rail network in the Eastern United States, operating in 23 states and Canada. CSX transports all sorts of materials, with coal being its largest revenue generator (27% of revenues in 2012).
With the improving economy, there will be more materials to transport, particularly those materials required in manufacturing and construction. This should cause earnings growth in all of the major railroad companies over the next few years at least.
CSX has two things going for it that long-term investors love to see: buybacks and dividends. CSX currently yields 2.44% and has increased the dividend for 6 years in a row (see chart), a trend that I expect will continue.
As far as share buybacks go, CSX Corporation (NYSE:CSX) has a great record, and in fact has reduced the number of outstanding shares by 14% over the past four years. I expect this to at least continue or even to accelerate over the next few years, as the management has approved larger and larger buyback plans.
Over 88% of the revenue in the railroad industry is generated by the four largest railroads: CSX, Norfolk Southern Corp. (NYSE:NSC), Union Pacific Corporation (NYSE:UNP) , and Burlington Northern Santa Fe, LLC (NYSE:BNI). The railroads are only mildly competitive with one another and share assets and interfacing systems. Just a bit about the competition:
Norfolk Southern Corp. (NYSE:NSC) is the closest competitor to CSX, also operating in the Eastern United States, with about 20,000 route miles in 22 states. Very similar in revenue makeup to CSX, Norfolk Southern Corp. (NYSE:NSC) also generates a substantial portion of its revenues from coal (26%).
Union Pacific Corporation (NYSE:UNP) is the largest U.S. railroad, operating over 32,000 miles of rail in the western part of the country. Their revenues are not quite as dependent on coal as the competition, less than 20% of revenues coming from energy-related cargo.
Burlington Northern Santa Fe (BNSF) is the second largest railroad, and is wholly owned by Berkshire Hathaway Inc. (NYSE:BRK.A). BNSF is headquartered in Texas and operates in the western two-thirds of the United States.
At just 12 times forward earnings, I think that CSX Corporation (NYSE:CSX) is a bargain right now. The consensus projected 11% forward earnings growth. For comparison, Norfolk Southern trades at 13.1 times forward earnings, with just 7% growth projected. Union Pacific trades at a higher valuation of 15.1 times forward earnings, however they are projected to grow at 14% going forward. It is also worth noting that Union Pacific Corporation (NYSE:UNP) is the only major railroad with an “A” credit rating, having lower debt levels relative to their size than the other two.
While any of these railroads look like decent investments, the cheap valuation of CSX Corporation (NYSE:CSX) and their growth potential, combined with their good dividend history and buybacks makes it the most attractive of the bunch for long term-investors.
Having said that, if you don’t insist on owning an individual railroad, Berkshire may in fact be the best way to gain exposure to the sector in your portfolio. Although it trades at a lofty 19.5 times forward earnings and pays no dividend (which admittedly will turn a lot of investors off), there is no company with a better history of creating long-term value for its shareholders. Currently, analysts are projecting a 13% forward growth rate for the company, which given the current economic recovery, I find to be a bit conservative. However you decide to play it, the railroad industry will be one of the big winners of the continued economic growth and your portfolio deserves some exposure to it!
The article This Industry Will Soar in the Recovering Economy originally appeared on Fool.com and is written by Matthew Frankel.
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