Riding the Rails

04/14/2006 12:00 am EST

Focus:

I'm always intrigued when several top advisors see similar opportunities. "The rails are one the best places to put your money in the market today," says Jon Markman, who along with  Louis Navellier, Richard Moroney, Ken Kam, and Elliott Gue , are "riding the rails."

(For more on the advisors cited below, please click on their photos.)

Markman, Jon"Virtually all of the rails are set to deliver very strong, above-consensus earnings-per-share growth in 2006 and 2007 as an underinvestment in capacity, smart investments in productivity-enhancing technology, and share buybacks all pack a punch. notes Jon Markman, in his recently launched newsletter, Strategic Advantage. "Norfolk Southern ( NSC NYSE) and CSX Corporation (CSX NYSE) are two of my favorites. 

"NSC is growing the volume of its intermodal (container cars) and coal business while steadily leveraging its back office. The business is much more than coal though, as aluminum, agricultural goods, fertilizer, and the like are all increasing their usage of the rail system to move goods to customers. Meanwhile, NSC put a lot of money into hiring new employees in 2005 and also into investments in new and refurbished rail cars and locomotives. That spending put cost pressures on earnings last year that will show up as gravy this year so I think there is a lot more upside to estimates than is widely understood. It's a great buy right now.

"CSX is a slightly different story, and actually more undervalued. The main issue here is that it is in the very early innings of operational improvements that the other railroads accomplished a couple of years ago. So CSX is as much an expense-reduction story as it is a volume-growth story. I estimate that CSX will earn $4.68 in 2007, which means it is trading at a 12.7 multiple despite growth in the 15% area. It is still more of a ‘show- me’ story, but I still think it's a good buy right now, even though it may require a little more patience than NSC."

Navellier, Louis"One of our new buy recommendations is Genesee & Wyoming (GWR NYSE)," says Louis Navellier, in his Emerging Growth Letter . "The company owns stakes in more than 40 shortline and regional freight railroads that operate over some 11,200 miles of track in North America and Australia. The company is North America’s second largest operator of short-line railroads. Genesee and its Australian joint venture partner, Wesfarmers, have agreed to sell the Western Australia operations of their Australian Railroad Group.

"CEO Mortimer Fuller, the great-grandson of founder Edward L. Fuller, controls a 40% voting stake. The company recently announced that the traffic on its North American freight railroads increased in February by 20.7% to 64,327 carloads. Traffic increased in coal coke and ores, but fell in lumber and forest products. The company also noted that its Mexican service continued to be affected by fallout from Hurricane Stan. As for its Australian operations, traffic was up 5.9% to 76,893 carloads in February. The stock recently split 3-for-2 and is a great buy below $33."

Gue, Elliott"We have done very well in our portfolio with railroad stocks and I think the next wave of the story is companies that sell infrastructure and services to the rail industry. That list includes rail signaling and communications gear maker Wabtec ( WAB NYSE). The company should benefit handsomely as the rails redeploy their cash flows to upgrade their tracks and rail networks to meet new demands. Another interesting play on the industry is Greenbrier Companies ( GBX NYSE), which manufactures all types of railcar and sells them to the railroad industry.

"As rails expand their capacity and try to increase their transport of coal, they will need more railcars. In fact, the industry is currently experiencing a shortage of several major types of railcar. Railcars, just like automobiles, wear over time. Parts like shocks, wheels, and braking systems need repair and maintenance from time to time. Overall, the current backlog of repair orders and new railcars totals close to $500 million; Greenbrier's market capitalization is just over $650 million, so that's a big number indeed. More aggressive investors should consider Greenbrier a buy under 42.50 with a stop at 36."

Moroney, RichardGreenbrier is also the latest featured recommendation from Richard Moroney, in his small cap, growth-riented service, Upside. He notes, "Capitalizing on an upturn in the railroad industry, Greenbrier (GBX NYSE) is delivering impressive growth. Greenbrier delivered 13,200 railcars in fiscal 2005, up from 10,800 in fiscal 2004. Strong relationships with rail carriers and manufacturers give Greenbrier a competitive edge. In February, GBX received a $100 million order from American Honda Motor—the largest-ever order for its autotransport railcars.

"While Greenbrier’s results are cyclical, the railroad equipment provider has delivered three years of strong growth in EBITDA. Management expects continued growth in orders for both intermodal and conventional railcars. With more companies moving production to lower-cost areas abroad, particularly in Asia, continued growth seems likely for intermodal shipments that must be transported from ship to rail.The stock, attractively valued at 15 times expected fiscal 2006 earnings, seems capable of reaching $45 to $50 over the next six to 12 months. Greenbrier is a Best Buy."

Kam, KenOn his Marketocracy Web site, Ken Kam monitors the trading activity of 60,000+ investors. For his stock selection process, he pays particular attention to the activity of the ten best performers—known as the m10. One of these m10 members, Gary Franklin, notes, "Energy prices remain at very high levels and Americans continue record level of imports.

"These factors are helping to create a sweet spot for railroad companies and this high demand for rail services is creating a need to expand the country’s rail capacity, creating a positive environment for Trinity Industries (TRN NYSE). Fundamentally, the company has never been stronger. Demand drivers are positive, order levels remain strong and we are excited about the opportunities presented by this upbeat market environment.

"The stock has already appreciated significantly over the past year, but the stock chart is still strong and beginning an entry point here is not a bad idea. If the market and TRN were to consolidate previous gains leading to a pullback to $50, I would buy more. Trinity’s businesses are in great segments and management will increase its leasing business to lower the risk going forward. TRN is an excellent mid-cap stock for the diversified portfolio."

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