(The following report appeared on the Seeking Alpha website on July 2.)
NEW YORK — North America’s largest railroad companies have room to increase their leverage, but any moves to boost debt will be restricted by their desire to maintain investment grade credit ratings, UBS Securities told clients in a note.
Canadian National Railway Co. [CNR] and Norfolk Southern Corp. (NSC) are the firm’s top picks, given that they are the cheapest in the sector on a price to earnings basis, are the highest quality names, should benefit most from the pricing environment and present the lowest risk.
Union Pacific Corp. (UNP) is the long-term pick for UBS due to its improving margins and large number of legacy contracts that will eventually be repriced higher.
The firm’s analysts also addressed the decline in railroad traffic since the third quarter of 2006, blaming high inventories of housing and light trucks. However, while light vehicle production declined for the past year, UBS expects an 8% increase in the third quarter.
But it says the U.S. housing market is less rosy and there doesn’t appear to be any signs of a turnaround. Nonetheless, rail traffic is expected to improve in the second half of the year.