A confluence of factors -- including the heavy hand of
regulators in Washington, D.C. -- is creating an unprecedented
profit opportunity for a select few companies in the rail
The federal obstacles for railroads certainly appear daunting.
For starters, new EPA regulations set to take effect in January
are placing a cloud over the U.S. operation of locomotives -- the
big engines that make the entire industry go.
On top of that, the Department of Transportation proposed new
safety rules last month that could force U.S. railroads to
upgrade portions of their rolling stock within two years,
especially tanker cars, at huge costs. The proposals include more
complex railcar standards, new mandates on braking controls, and
At the same time, ongoing efforts by the White House to
discourage coal production - a major source of freight revenue -
appear to be making inroads, with coal companies shutting mines
and lowering output. (My colleague Joseph Hogue recently detailed
his favorite income trade in the sector
despite those headwinds.)
There is a silver lining, however, to all the government
involvement in railroads for at least three U.S. companies. In
fact, the more federal red tape comes down the pike, the sweeter
it is for these three.
They are all three manufacturers of rail equipment and vehicles,
and all are running at or near full capacity to cope with a rush
of orders ahead of federal deadlines. Even sweeter, at the same
time they are serving as a proxy for a resurgent U.S. economy,
and they are shipping huge amounts of shale oil and gas from the
new American energy boom.
The stocks of all three are up sharply, but there is still time
to get in before their valuations catch up with their growth
The companies are railcar makers
Trinity Industries (NYSE:
, and locomotive manufacturer
Railroads have always been good indicators of the health of an
economy -- the more the economy grows, the more products are
shipped by rail to meet increased demand. Greenbrier, Trinity and
Wabtec are perfectly positioned to benefit from the macro growth
trend because the more the economy grows, the more demand there
is for their equipment.
These companies are also benefiting from ongoing growth in
intermodal traffic, the traffic that occurs when truck trailers
full of cargo are loaded onto trains for at least part of their
routes instead of going exclusively by highway. Intermodal
shipping by rail is setting records for volume and was up about
7% year-over-year in July.
Lastly, Greenbrier, Trinity and Wabtec are also beneficiaries of
one of the biggest business stories in America -- namely the
drive toward energy self-sufficiency propelled by the fracking
boom. The Wall Street Journal reported last month that oil
shipments by rail are growing exponentially.
Like many heavy cyclical stocks, these three tend to trade at
respectable multiples. Greenbrier, for instance, has a forward
price-to-earnings (P/E) ratio of 16.5 although the stock is up
98% this year. Trinity's forward P/E is 12.1 after a gain of 61%
this year, while Wabtec has a forward P/E of 19.8 after a 9.8%
In terms of return on equity over the past 12 months,
Greenbrier's ROE is 18.9%, Trinity's is 23.1%, and Wabtec's is
19.9%. Greenbrier doesn't pay a dividend, but Trinity and Wabtec
offer slim yields of 0.9% and 0.3%, respectively.
Risks To Consider:
Unexpected approval of the Keystone XL pipeline and similar
pipeline proposals by the White House could reduce surging shale
energy shipments by rail, as could new environmental restrictions
on fracking. If Republicans gain control of both houses of
Congress in November, some government regulations forcing massive
safety and equipment upgrades could be rolled back. The rail
industry is intensely sensitive to the economic cycle, and a
slowdown or renewed recession would have a direct impact on these
Action To Take -->
Go long any or all of GBX, TRN and WAB. Wall Street is taking a
positive view of all three: The First Call consensus of more than
10 analysts for each stock is a "buy," and Capital IQ is bullish
on all three from a technical viewpoint.