(The following article was posted on the Akron Beacon Journal website on November 28.)
AKRON, Ohio — Although railroads were deregulated in 1980, they remained stuck in a dismal cycle of overcapacity and rate cutting. But because of higher fuel costs and a shortage of long-distance truck drivers, railroads are handling more long hauls now, with trucks delivering goods to their final destinations.
“It’s an old, staid industry that’s finally on the threshold of becoming a growth business,” said Don Hodges, whose Hodges fund lists BNSF railway as its top holding.
In a nutshell, rails have all the business they can handle — and a newfound ability to raise rates. In the second quarter of 2005, year-over-year volume for the six biggest railroads rose 2 percent, but revenue per carload rose 10 percent, and profits shot up 46 percent. The historic rate of revenue growth has been 1 percent, said John Barnes, an analyst at investment bank BB&T.
No wonder the Dow Jones U.S. railroad index a month ago was up 57 percent over the previous two years. But it may not be too late to invest.
Share prices could rise another 15 percent to 30 percent by the end of 2006 as the industry’s improving record turns more doubters into believers, said Morgan Stanley analyst James Valentine.
The four biggest U.S. railroads are BNSF, Norfolk Southern, Union Pacific and CSX. You could buy any of these — or one of the two biggest Canadian lines, Canadian National and Canadian Pacific — and participate in the industry’s rebirth. Our favorites are Burlington Northern Santa Fe (symbol BNI) and Norfolk Southern (NSC).
BNSF of Forth Worth, Texas, has a 30,000-mile rail system, concentrated in the West and Midwest; it puts the company in an ideal position to handle growing traffic from Asia, as well as coal and farm products.
Burlington has also been far more successful than its rival, Union Pacific in Omaha, Neb., in ramping up to meet rising demand and pushing through price increases. At $65.45, the stock is up more than 60 percent over the past year, but it still trades at less than 15 times next year’s expected earnings of $4.40 a share. Valentine predicted weeks ago, when the share price was below $60, that it would hit $68 to $73 within 18 months.
In the East and Midwest, Norfolk Southern of Virginia counts on coal for 46 percent of its revenue — a higher percentage than any of its U.S. counterparts. But Valentine expects coal to be the highest-growth segment for railroads next year.
Until recently, Norfolk Southern was one of the cheapest railroads to buy. At $43.89, the stock trades for 14 times next year’s expected earnings of $3.08 per share.