Railroad Companies: Which is the Better Buy?

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The financial pages and blogs have been full of stories recently about railroads. Yes, stodgy old railroads are making some serious money. After decades of losing ground to the trucking industry, railroads have gotten back on track (pun intended).

The original golden era of railroads ended in the 1960s, when the interstate highway system made trucking a viable option. But as the wheels of progress have turned, the highways have become far more congested and the price of gasoline has risen so much that railroads have become competitive again.

Thanks to improved freight car design and other factors, the average freight train in 2010 carried 61% more weight than it could in 1980, and at a rate that is 106% more efficient. In 2010, freight trains carried 43% of intercity cargo, compared to 31% carried by trucks, according to the American Association of Railroads.

So if you want to add a railroad company to your portfolio, which stands out as the best opportunity? I took a look at the top two independent railroad companies, Union Pacific (NYSE: UNP) and CSX (NYSE: CSX). I excluded BNSF as it is wholly owned by Bershire Hathaway.

In my analysis, I tend to rely heavily on analyst opinion and estimates. I figure they have been studying the stock for a while and probably have a better handle on the numbers than I do. I do look at current news, as well, but I like to lean more on the numbers to provide an objective recommendation.

Union Pacific is currently trading at about $125, just off its 52-week high of $129.27 reached earlier in the month. It has a PE 16.19 and pays 1.90% dividend. The current analyst rating is a 1.9 (1.0 = Strong Buy, 5.0 = Sell) with a mean target price of $136.17, for a potential gain of 9%. There are 8 Strong Buy recommendations, 14 Buys, and 6 Holds.

The consensus earnings estimate for year-end 2012 is $8.36. The estimate for year-end 2013 is $9.53, 14% higher than 2012.

The stock is up 20% year-to-date, and up 43% since this time last year. The current estimated annual growth rate for the next 5 years is 14.33%, compared to an industry average of 13.33% and a sector average of 15.54%.

CSX is trading at approximately $23 per share, right at its 52-week high. It has a PE of 12.98 and pays a 2.60% dividend. Currently analysts rate it a 2.0 (9 Strong Buys, 13 Buys, 5 Holds and 1 Sell) with a mean target price of $26.38, for a 15% potential gain.

CSX’s year-end 2012 consensus earnings estimate is $1.84, 10% higher than actual 2011 earnings. Its estimate for year-end 2013 is $2.05, 11% higher than 2012.

The stock is up 11% since the beginning of 2012. The current 5-year annual growth is estimated at 13.48% vs the S&P at 9.92%.

Norfolk Southern (NYSE: NSC) just announced a lowering of estimates for 3rd quarter, in part because of weak coal shipments. Earlier in the day, UBS analyst Kevin Crissey cut ratings on several railroad stocks, saying “Rails have some good commodity trends but were hit by a massive drop in coal volumes as natural gas prices plunged and now face a weak harvest and soft met coal trends.” He cut both Union Pacific and CSX to Neutral.

However, rail is still the cheapest and most efficient mode of transporting goods around the country, and I believe that this downward trend in shipments will reverse as the economy improves. According to the Department of Transportation, rail freight transportation demand will increase 88% by 2035. And US companies currently carry less than 50% of the total freight in America, which leaves a lot of room for market share growth.

So which of these two companies is the better buy? I have to go back to the numbers. With Union Pacific’s current PE and year-end 2013 earnings estimate, I see a stock price of $154, or a potential gain of 23%.CSX’s PE and earnings estimate leads to a stock price of $26, for 15% upside. 

I recommend Union Pacific as a buy with a target of $150 by year-end 2013.

khern0203 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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