Is it Time to Book Profits?

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

Talk about railroad stocks, and the market greets it with pessimism. However Norfolk Southern (NYSE: NSC) seems to be doing it right. The company has the largest and the widest railroads network in the North American region. The company has increased coal transportation freights to offset the dip in revenues, due to the weak coal demand witnessed in recent quarters. Additionally, over the last 2-3 years, the company has been seen reducing its dependence on coal transportation, and industrial commodities are taking its place. The management seems optimistic about the company’s future despite the shale gas boom, because of the increased demand for industrial metals and minerals, mainly driven by the US economic recovery.

Shares of Norfolk Southern yield a decent 3.2% with a modest payout of 33.4%. Analysts expect its EPS growth for the next 5 years to average around 13% annually. The company has also been repurchasing its shares, and over the last 6 years, it has repurchased 24% of its outstanding shares. In Q3FY12, the company repurchased 4.2 million shares, taking the YTD repurchase count to 16.5 million shares. If the board decides to continue its share repurchase program in 2013, we can safely expect its EPS growth to further bolster. With a P/E of 11.37x and a PEG of 0.90x, shares of Norfolk Southern appear to be quite undervalued, and I believe that the company is one of the perfect income growth picks.

CSX Corp (NYSE: CSX) also appears to be a lucrative investment option. Coal transportation accounts for 32% of its total revenues, and the company managed to improve its operating margins when the demand for coal was weakening. In the recent quarter, the company recorded a 10% climb in intermodal revenues with industrial shipments growing by 5%. Additionally, its export coal volume fattened by 20% YoY, but analysts were worried about its slowing growth rate. Also due to the recovering domestic economy, automotive revenues rose by 18%. In short, almost all its segments grew except for commodities like gasoline and domestic coal.

I believe that as domestic steel production rebounds and the $85 billion worth of liquidity trickles down to the common man, shipments of both the commodities would witness an uptick. During the recent earnings release, its management said, “Intermodal growth will lead the way as our strategic network investments and strong service delivery will continue to support highway-to-rail conversions.” The management also announced that it would be looking to reduce its dependence on coal. Shares of CSX Corp carry a decent yield of 2.8% with a modest payout of 28.8%. Its shares appear to be undervalued with a forward P/E of 10.67x and a PEG of 1.32x.

Another railroads company Canadian Pacific Railway Limited (NYSE: CP), has had a golden run in 2012. Its shares have risen 47% and I believe its time investors should look to book profits. Shares of CP trade at a trailing P/E of 25.18x with a PEG of 1.57x, which indicate that the stock is overvalued. Additionally it appears to be more expensive than its peers, and its 2014 forward P/E equates to around 38x.

As Buffett says, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” In my opinion, investors should be wary of Canadian Pacific and should look to invest in Norfolk Southern and CSX Corp.

PiyushArora 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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