A major objective of the initiative is to free up some of the freight bottlenecks in the midwest that tend to cause delays for freight heading west. It plans to do this by building a double-stack cleared corridor for intermodal shipments between the Midwest and mid-Atlantic ports, which should benefit CSX Corporation (NYSE:CSX).
Intermodal is highly lucrative business, and can help offset the company’s dragging coal business. CSX is also optimistic, believing that its businesses (not including coal) can outpace the growth of the sluggish U.S. economy.
Norfolk Southern Corp. (NYSE:NSC) also seems to be optimistic, even with a problematic and challenging coal business, which an executive from the company stated would be a “wild card for the immediate future.” The company realizes that while coal has been a historical staple of the company’s business and may even one day be a staple of its business again in the future, as of now it needs to be offset with another business that is currently more profitable– such as emerging energy markets. These include sand, pipe, and other materials for shale-gas production– and of course crude by rail.
Norfolk Southern Corp. (NYSE:NSC) recently built and opened its Birmingham Regional Intermodal Facility in Alabama, worth around $97.5 million, which was created to allow a more efficient and higher-capacity intermodal freight rail route between the Gulf Coast and the Northeast.
Other opportunities for rail transportation
Besides emerging energy markets, other possibilities for profit are popping up for railroad companies. With auto companies (including both Honda Motor Co Ltd (NYSE:HMC) and Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY)) planning to expand and boost production in Mexico, finished vehicle production in Mexican markets may increase by as much as 35% by 2015, which will provide great opportunities for Kansas City Southern (NYSE:KSU) to capitalize on of the shipping and returning of raw materials to and from Mexico, Canada, and the United States.
Kansas City Southern (NYSE:KSU) is also poised to benefit from oil as well, as its rails connect the Bakken with various refiners on the Gulf of Mexico. This should help it to keep the profits flowing, especially if pipelines are continually delayed.
Valuations
Ok, so how do these companies stack up at their current levels?
| P/E | Forward P/E | Dividend (yield) | Market cap (billions) | |
|---|---|---|---|---|
| UNP | 18.45 | 14.42 | $2.76 (1.70%) | $73.32 |
| CSX | 13.86 | 12.48 | $0.60 (2.40%) | $25.63 |
| NSC | 14.04 | 12.18 | $2.00 (2.60%) | $24.57 |
| KSU | 29.91 | 21.83 | $0.86 (0.80%) | $12.15 |
While Kansas City Southern (NYSE:KSU) looks overvalued at current levels with not much dividend yield supporting it, the other rail companies look more attractively valued going forward. If Union Pacific Corporation (NYSE:UNP) can grow its earnings and meet forward estimates, its current trailing P/E isn’t as expensive as it looks.
The East Coast rail plays look best currently, but they have also been negatively impacted by coal and may continue to see it drag on their profitability. They also offer the better paying dividends, however.
The bottom line
Investing in America’s railroads should be very profitable going forward. The shale oil and gas boom in the U.S. should continue to give these railroads some steam. Intermodal should also give a boost, as it is cheaper with rail than by truck. This could really pickup if trains become powered by natural gas, which only costs around $0.50 per gallon– as opposed to about $4.00 for diesel.
My favorite picks are CSX Corporation (NYSE:CSX), for its cheap valuations and solid dividend yield, and Union Pacific Corporation (NYSE:UNP), for its proximity to the Bakken and enormous size and scope. Both are great rail plays, and investing in both gives an investor exposure to both coasts.
Joseph Harry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Is It a Good Idea to Invest in U.S. Railroads? originally appeared on Fool.com.
Joseph 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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