(The following report by David Landis and Lisa Dixon appeared at Kiplinger.com on November 4.)
Railroads such as Burlington Northern Santa Fe (BNI) are in an enviable position they’ve not enjoyed for a century: They have all the business they can handle — and an ability to raise rates.
“It’s an old, staid industry that’s finally on the threshold of becoming a growth business,” says Don Hodges, whose Hodges fund lists BNSF as its top holding.
A decade ago, few retail goods moved by rail from U.S. factories. But now, just about anything you pluck from a Wal-Mart shelf may have come by train via a seaport. Because of high fuel costs and a shortage of long-distance truck drivers, railroads handle more of the long hauls, and trucks deliver the goods to final destinations.
Railroads’ biggest advantage is the ability to haul bulk commodities, including coal and grain, and large objects, such as cars, that can’t be shipped as efficiently any other way. Coal, especially, has been a boon for the industry. Coal accounts for about 20% of BNSF’s revenues.
But railroads’ growth prospects haven’t gone unnoticed by the market, and BNSF’s stock has soared nearly 50% since this time last year. It hit a new 52-week high on Thursday. Standard & Poor’s analyst Andrew West acknowledges there’s less room for BNSF’s stock to run than there used to be, but he still recommends buying the shares.
BNSF’s 30,000-mile rail system is concentrated in the West and Midwest, putting the company in an ideal position to handle growing traffic from Asia, as well as coal and farm products. Burlington also has been far more successful than its rival, Omaha-based Union Pacific, in ramping up to meet rising demand and pushing through price increases.
West expects BNSF’s coal and intermodal businesses to help drive the company’s revenue and volume growth “above industry averages for the foreseeable future,” boosting profitability and cash flow.
Analysts raised their earnings estimates for BNSF after the company reported better-than-expected third-quarter earnings last week. Earnings per share grew more than 40% from the same period a year ago, driven in large part by rate increases, notes Morgan Stanley analyst James Valentine.
At $65, the stock trades at about 14 times the 2006 consensus profit forecast of $4.54 a share.