...and Riding the Rails

11/11/2005 12:00 am EST

Focus:

"Railroads are decidedly on an upturn, as shipping rates and cargo demand are both on the rise," says Roger Conrad in a review of the rail industry. Charles Carlson is bullish on the transports, particularly railroads. And  Gordon Pape looks to a Canadian rail line.

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

Carlson, Charles"One of the most interesting storylines for the stock market this year is the strength of the Dow Jones Transportation Average. which recently went to its highest level ever," notes Charles Carlson, editor of The DRIP Investor . "How does one reconcile this apparent contradiction? Actually, I think the strength in the Transports speaks to the underlying strength of the economy. Another dynamic at work here is the operating improvement in railroads. Over the last decade, the railroad sector has become much better managed, which has resulted in much-improved productivity for many railroad companies.

"Among railroad issues, I like Norfolk Southern (NSC NYSE). "The firm  posted per-share-profit growth of 28% on revenue growth of 16% in the September quarter. All three of the railroad’s divisions posted double digit sales gains, with coal revenue growth of 22% setting the pace. At 13 times projected 2006 earnings of $3.09, Norfolk Southern trades at a discount to its history and its peer group average. It should be able to continue raising prices, and its mix of operating momentum and value makes an appealing investment case."

Conrad, Roger"The rails that have survived are a hearty bunch, having had to endure literally generations of lean years," notes Roger Conrad in Personal Finance. "But for the first time in a long while, rail investors can look forward to real, long-term growth as the infrastructure is renewed. And the stocks are cheap, too. The product of the merger of 390 rail lines during the past 150 years, Burlington Northern Santa Fe (BNI NYSE) is the biggest US railroad by market value. Its network now extends to 28 states. The company is more leveraged to the coal business than other rails, a benefit that helped spur a 47% first quarter profit boost on a 15% jump in freight revenue.

"Union Pacific (UNP NYSE) is America’s largest railroad by size. Like Burlington, the railroad transports virtually every type of movable product, with a particular focus on petrochemicals from the Gulf Coast and coal from the West. Despite its exposure to areas hit hard by the hurricanes, it expects little earnings impact. That should open the door for more strong results ahead.CSX (CSX NYSE)  is also benefiting from rising coal volumes. CSX —which runs 22,000 miles of rail in the eastern US—will take a $25 million hit from hurricane damage and lost business. That’s the most of any major railroad, but it won’t stop the company from reporting strong earnings this year, such as the 39% profit boost reported in the second quarter. The stock is at less than twice book value and p/e ratios in the low double digits."

Pape, GordonGordon Pape, along with analyst Gavin Graham, look north of the border for their latest growth and dividend stock of the month. "Canadian National Railway (CNI NYSE) is a leader in the North American rail industry, operating a network of tracks in Canada and the US. The company has the best operating ratio in this industry and is committed to moving more freight, more quickly, and with fewer assets. It’s the only railroad that crosses the continent east-west and north-south, serving ports on the Atlantic, Pacific, and Gulf coasts, while linking customers to all three NAFTA nations. The railroad is positioned to be a major beneficiary of the resource boom now driving growth in Western Canada.

"In our opinion, Canadian National remains the best-managed railway, with the lowest operating ratio. It was recently upgraded from BBB+ to A- by S&P. Meanwhile, 80% of its contracts have a fuel surcharge that kicks in above US$25 per barrel of oil. The shares are suitable for investors who are more interested in future dividend and capital gains growth than in immediate high cash flow. The stock should be held in non-registered accounts so as to obtain the tax advantage. A well-balanced income portfolio should include securities that offer high potential for future cash flow growth. CNI fits the bill nicely."

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