The white noise of the Federal Reserve has drowned out the
roar of the rail industry. While others argue about the
macroeconomic picture, railroads have been chugging along at a
steady pace. The Dow Jones Transportation Index has soared 18%
this year -- the average gain of the top three railroads is
The U.S. rail market is a $60 billion industry, with more than
140,000 miles of track across the nation. And what's being moved
Oil. Coal. Chemicals.
Coal alone accounts for 43% of the total tonnage moved by
train. Crude oil shipments, trending away from pipelines, spiked
256% in 2012 to 167 million barrels in nearly 234,000 freight
cars. By 2016, more than 2.7 million barrels of oil a day is
expected to be transported by rail -- more than the entire
Rail ships oil faster than pipelines -- 15 to 20 miles an hour
by train compared with 4 to 5 miles an hour by pipeline. It's
also more flexible. The expanse of the rail system -- and
avoidance of political and regulatory quagmires that plague
pipelines -- makes shipments by train a more attractive
An energy revolution is taking place in America thanks to new
technologies in drilling and higher oil prices. With that
revolution comes the need for more efficient overland
transportation. One company in particular is in the right place
at the right time.
Large rail companies stand to profit considerably from the
increase in oil and gas market demands and have attracted
investors such as Warren Buffett, whose
Berkshire Hathaway (NYSE: BRK)
acquired BNSF in 2009, and Bill Gates, who owns 12% of
Canadian National Railway (
, making him its largest shareholder.
A little-known industrial conglomerate that dominates the
railcar manufacturing and leasing industry,
Trinity Industries (
saw net revenue increase 79% last year and boosted its dividend
22%. In its second-quarter earnings report on July 31, Trinity
beat analysts' estimates with revenue of $1.1 billion, up 7% from
the same quarter last year, and profit of $84 million, up nearly
A stock that stays under the analysts' radar often proves to
be quite a boon for savvy investors who can identify value.
Trinity may have the most inherent opportunity right now because
no one's looking at the numbers.
Trinity's main competition,
American Railcar (Nasdaq: ARII)
, also recently announced impressive second-quarter earnings and
reported heavy investment in its leasing business. Although
American Railcar has a market share of less than $750 million, it
has much the same story as Trinity and stands to profit from the
same catalysts. However, American's negative free cash flow
concerns tied to high capital expenditures make Trinity the
better play for now.
Investors in Trinity have an additional perk in the form of
its dividend, while yielding a conservative 1.4%, has been
increased three times since 2010, for a gain of more 60 %. With a
payout ratio of about 13%, there's plenty of room for continued
In its earnings report this week, Trinity also raised its
full-year earnings expectations to $4.20 to $4.40 a share, up
from the range of $3.80 to $4.05 it forecast in May . Trinity's
forward price-to-earnings (P/E) ratio is less than its current
P/E, which can be a powerful indicator of future earnings
As higher earnings are reported, it's a fair assumption that
Trinity's P/E should increase from 11, but not exceed its
historical average of 17, which gives a price estimate of
anywhere between $44 and $68 - that's a gain of 19% to 83%. The
consensus price target on the Street is $45.75 in the next 12
months, according to S&P Capital IQ.
Risks to Consider:
A slowing economy or lower than expected oil production could
derail Trinity's railcar sales and keep its P/E low. Leasing
operations may hurt short-term earnings as revenues from such
operations are not recognized as occurring as a sale but from a
monthly income stream.
Action to Take -->
A solid balance sheet and thriving railcar segment with a
multi-billion-dollar backlog should give Trinity the momentum to
climb higher over the next 12 months.
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