Ride the Rails to Riches

09/30/2010 12:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says a railroad stock offers investors a good way to profit from a (slowly) recovering economy.

Despite an economic recovery that at times feels a bit, well, soft, there are companies that are doing well.

One company is CSX (NYSE: CSX). This railroad operator has put up nice growth numbers in the last few quarters, and record profits are expected this year and next. Long term, continued efficiency improvements, coupled with an oligopoly in the industry (four major railroads account for nearly 90% of US rail business), should support the top and bottom lines.

CSX owns the largest rail network east of the Mississippi, with some 21,000 miles of track spanning 23 states and two Canadian provinces. The firm groups its freight into three major categories: merchandise (55% of six-month revenue), coal (30%), and intermodal (12%). (Intermodal shipping uses containers over several modes of transport—Editor.)

Merchandise revenue jumped 20%, and volume increased 13% through the first six months of this year. Broad-based strength, especially a 64% jump in auto volumes, drove the increases. Coal revenues jumped 12% in the first half, despite a 4% drop in volume. Intermodal revenue was up 13% on a 16% increase in volume.

The strong revenue gains fueled a 36% increase in per-share profits for the first half of the year. Quarterly earnings comparisons should remain favorable in the second half.  For 2010 overall, Wall Street is expecting per-share profits of $3.86. That estimate has risen 8% over the last 90 days. Given that CSX has handily beaten analysts’ consensus estimates in the last two quarters, the final number for 2010 could be closer to $3.90 to $3.95. For 2011, the consensus estimate is $4.46 per share, which would be a nice double-digit [percentage] advance over 2010 results.

CSX’s dividend has increased more than fourfold since 2004. The current quarterly payout is 24 cents per share. The indicated annual dividend of 96 cents represents just 25% of the company’s expected earnings for 2010. Thus, there is plenty of room for further dividend increases, especially as the company’s bottom line grows. The stock’s current yield is 1.7%.

[At more than $55.50 at Wednesday’s close,] CSX stock is trading off its 52-week high of $62, and should test that level over the next six months.

CSX traded for nearly $71 in 2008. While a quick rebound to that level is not likely over the next year or so, the stock should outperform the broad market over the next 12 months. Of course, a more substantial slowdown in the economy would not be good news for the company or the stock.

Investors [who like dividend reinvestment plans] should note that CSX has a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $500.

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