(The Associated Press circulated the following on May 18.)
NEW YORK — An analyst at Morgan Keegan & Co. initiated coverage of the five largest U.S. railroads after the markets closed on Thursday, rating four of the names at “Outperform.”
Art W. Hatfield at Morgan Keegan placed “Outperform” ratings on Union Pacific Corp., Burlington Northern Santa Fe Corp., Norfolk Southern Corp. and Kansas City Southern. Hatfield rated CSX Corp. at “Market Perform,” saying he doubts the company can sustain the level of growth it has recently experienced.
The opposite is true for Union Pacific, Hatfield said. He think the company’s performance has lagged its peers and, therefore, has more opportunities for growth. Union Pacific carries the industry’s greatest number of legacy contracts, which will soon expire and get re-priced at higher rates.
The analyst likes Burlington Northern, the nation’s second-largest railroad behind Union Pacific, mostly for its operating efficiency and return on invested capital.
“In addition, we believe potential earnings upside exists if the economic environment begins to firm,” Hatfield said, noting that the railroad is well-positioned to serve the sprawling the Powder River Basin coal field and intermodal ports of the Pacific Coast.
Hatfield also rates Norfolk Southern and Kansas City Southern as premium picks. The analyst considers Norfolk Southern the sector’s most undervalued name and said its operations are ideally positioned to serve eastern ports and coal producing regions, as well as western routes through its interchanges.
Kansas City Southern, meanwhile, stands as the sector’s other great growth story, Hatfield said. He cited the company’s Mexican unit, which is now fully integrated into its U.S. operations.
“With the company’s two rail networks now integrated, it has a renewed opportunity to gain efficiency improvements, cross-sell existing business, and pursue new business along the lines in both the U.S. and Mexico,” Hatfield said.
Shares of railroads stocks have outperformed recently, driven by several quarters of upside earnings reports and bullish interest from major investors.
Billionaire investor Warren Buffett, for instance, recently made public the significant stakes his group took in Union Pacific, Burlington Northern and Norfolk Southern. Buffett, who runs the investment group Berkshire Hathaway Inc., said he chose to invest in railroads because those businesses have a better competitive position today than in past years.
When news of Buffett’s interest in the sector first surfaced in April, shares of Union Pacific, Burlington Northern and CSX Corp. hit 52-week highs. Other significant investors, including Carl Icahn and The Children’s Investment Fund, have also revealed stakes in the sector recently.