Railroads are so two centuries ago.
Except they're not.
Railroads now carry about 40% of all freight in the United States
and that percentage may yet grow higher.
With increased shipping throughout the North American Free Trade
zone, which includes Canada, the United States and Mexico, the
railroads are investing in new track and hubs to expand their
Spotlight on Mexico
On May 29, with both New Mexico Governor Susana Martinez and
Chihuahua Governor Cesar Duarte looking on, Union Pacific
officially launched its new $400 million transportation hub near
the southern border of New Mexico.
Completed a year early, the hub is expected to spur job development
and open up business to Mexico.
Union Pacific said the hub can handle up to 225,000 containers and
is on track to beat the initial first year estimate of 150,000
Mexico is now the 8th largest auto manufacturer in the world.
American manufacturers are also moving factories south of the
border as Chinese labor becomes more expensive, putting costs in
Mexico on par with those in Asia.
Parts and commodities are flowing from the north and finished cars
and refrigerators are being shipped back to consumers in the United
States and Canada.
Union Pacific controls 6 rail entries into Mexico. It also owns 26%
of Ferromex, Mexico's largest railroad.
Kansas City Southern is also a big player in Mexico. It is the only
American rail company with actual rail lines snaking across
Mexico's interior. Its subsidiary, Kansas City Southern de México
S.A., shares a concession with Ferromex that feeds into the
important port city of Veracruz.
Kansas City Southern derives about 50% of its revenue from Mexico.
Energy Is Still a Growing Industry
Energy shipments by rail will remain an increasingly important part
of the energy complex, even if large pipeline projects, like
Keystone, are eventually built.
In Canada, according to the National Energy Board, shipments of
crude by rail have jumped 900% since the start of 2012 to 146,047
barrels a day as production in the Alberta oil sands increased. But
this still dwarfs the amount shipped by pipeline in Canada, which
was 97% of total production.
Still, the rails are so busy in Canada that some farmers had
trouble finding room on the trains to ship their grains last year.
In the United States, rail accounts for just 3% of all crude
shipping methods. Even trucking was a higher percentage at 4%. But
rail will continue to see volumes grow as it becomes a more popular
way for oil companies to transport crude.
Is It Too Late To Get In?
Investors have figured out the railroad story. They have piled into
the major American and Canadian railroad companies and have pushed
the stocks up to new all-time highs.
Should you be buying these stocks now?
This is an industry that is still experiencing double digit
earnings growth. Valuations, while on the high side historically,
also aren't excessive.
With the energy, chemical and agriculture sectors still strong, and
coal starting to recover, the future for the rails looks brighter
Three Hot Railroad Stocks
There are only so many railroads in the United States, Canada and
Mexico. The Zacks Railroad Industry has a list of 7 companies.
Even though the entire industry is strong, I narrowed down that
list to the 3 companies with the best Zacks Rank and strong
fundamentals, including double digit earnings growth.
1. Union Pacific Corporation
Kansas City Southern
Canadian National Railway
Union Pacific services 23 western states and the Gulf Coast
shipping agricultural products, automotive, chemicals, industrial
products, coal and intermodal. It is the only railroad that
operates at all 6 gateways to Mexico.
The recently opened $400 million Santa Teresa, New Mexico rail
facility, which includes a fueling station, crew change buildings
and an intermodal ramp, provides the company with a key access
point to Mexico. It will also create greater efficiencies along its
Sunset Route, the 760 mile rail line from El Paso, Texas to Los
Forward P/E = 18.3
Expected 2014 Earnings Growth = 16%
Expected 2015 Earnings Growth = 14%
Dividend Yield = 1.8%
Zacks Rank #2 (Buy)
2. Kansas City Southern
Kansas City Southern was the first railroad in the United States
established with a north-south axis with the dream of shipping
lumber and other commodities from the central states to the Gulf
Coast. Recent expansion into Mexico has given Kansas City Southern
the only fully-owned rail lines connecting Mexico City and the port
city of Veracruz with Texas shipping hubs.
Forward P/E = 23
Expected 2014 Earnings Growth = 17%
Expected 2015 Earnings Growth = 16%
Dividend Yield = 1%
Zacks Rank #2 (Buy)
3. Canadian National Railway Company
Canadian National Railway operates a transcontinental Canadian
railroad servicing the ports of Vancouver, Montreal and Halifax and
large metropolitan areas of Toronto Edmonton, Winnipeg and Calgary.
In the United States it also connects to New Orleans, Mobile,
Chicago, Memphis and Detroit.
It ships agriculture, chemicals and industrial products and is also
discussion to ship Alberta oil sands crude on the rails to the
United States for refining.
Forward P/E = 18.8
Expected 2014 Earnings Growth = 18%
Expected 2015 Earnings Growth = 13%
Dividend Yield = 1.5%
Zacks Rank #3 (Hold)
Transportation Is Still Key
While it may seem like the railroads are part of the "old" economy,
they have become a vital component in the operation and success of
NAFTA and in the movement of goods across the entire North American
As the North American economy heats up, it will be the rails that
will be the prime beneficiaries.
It's not too late to jump aboard.
[In full disclosure, the author of this article owns shares of
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