This Company Will Grow its Profits in the Recovery
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lately, I have been exploring companies that should benefit the most from the continuing economic recovery and the various activities that go along with it. Examples of what will occur if the recovery continues include increased manufacturing and construction activity, and a sector that will benefit greatly from both is the transportation industry, specifically railroads. Having lived in the Southeast for my entire adult life, the railroad company whose operations I am most familiar with is CSX (NYSE: CSX), so we’ll start there and then see how they compare to some of their competitors.
CSX’s rail network is the largest in the eastern U.S., operating in 23 states and Canada with over 21,000 miles of track. The majority of the company’s revenue comes from four sources. Coal shipments account for 27% of CSX’s total revenue and mostly include deliveries to utility companies. Merchandise freight accounts for almost half of CSX’s revenues, and major products are chemicals, forest products, and metals. Automotive freight makes up another 10%, and the rest of CSX’s shipments are classified as “intermodal transport,” which means transporting freight using one container for a variety of shipping methods (rail, ship, truck), an example of which is shown below.
Growth and Valuation
While the economic recovery won’t necessarily help things like coal revenue, the merchandise freight business (CSX’s largest revenue stream) stands to benefit greatly, as most of what they ship has to do with the two things mentioned earlier: manufacturing and construction. Additionally, as a result of the recession, railroad companies have taken steps to improve the efficiency of their business, which has resulted in return on invested capital nearly doubling from 8.7% to 16.6% since 2005.
CSX trades for just 13.2 times TTM earnings, which sounds like a bargain, especially considering the recovery-driven earnings growth that is expected over the next few years. The company is expected to earn $1.78 per share this year, rising to $2.02 and $2.28 in 2014 and 2015, respectively, for annual earnings growth of 13.5% and 12.9%. Additionally, CSX has a great track record of increasing shareholder value through both dividends and buybacks. Shares currently yield 2.42% and the company has raised the payout consistently over the past several years. The company’s buyback program is even more impressive, with the total number of shares dropping by about 14% since 2009.
Competitor on the East Coast: Norfolk Southern
As the heading implies, Norfolk Southern (NYSE: NSC) operates in the same territory as CSX and is just a bit smaller in terms of rail network. Norfolk Southern pays a slightly higher (2.65%) yield than CSX, but trades at a slightly higher P/E of 13.6 times TTM earnings, with similar growth expectations. When it comes to Norfolk Southern and CSX, it is a coin flip, but I give the slight edge to CSX due to shares being just a little cheaper.
West Coast Giant: Union Pacific
Union Pacific (NYSE: UNP) is a much larger company, almost three times the size of CSX by market cap. Union Pacific operates more than 32,000 miles of rail in the western United States. Although Union Pacific is the largest, it is also the lowest yielder (1.77%) and the most expensive at 18.3 times TTM earnings. However, it is expected to be the greatest beneficiary of such trends as increased crude oil shipments and more automobiles shipped west, and earnings are projected to climb by 15.1% this year and 14.4% next year, slightly above peers.
Buy, Sell, or Hold?
Union Pacific seems to be a bit expensive right now, but the other two companies are very reasonably valued relative to their projected growth. CSX should benefit greatly from manufacturing and construction gains over the next few years, and longer-term should benefit from increased shipments of coal, the demand for which is historically low right now.
With 21,000 miles of track serving two-thirds of the U.S. population, CSX maintains a valuable proprietary asset. Still, this railroad will face difficult obstacles in the years ahead due to a domestic surplus of natural gas and coal’s declining popularity. To help investors better understand how CSX can deal with these challenges, The Motley Fool has released a brand-new premium research report authored by Isaac Pino, Industrials Bureau Chief and transportation expert. Isaac provides an in-depth look at CSX’s competitive advantages, risk areas, and prospects for the future. Simply click here now to access your copy of this invaluable investor's resource.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!