By all accounts, it’s been a pretty good year so far for U.S. freight railroads – earnings are up over last year and rail carload volume rose by nearly 8% in the first quarter. Although the economic recovery is proceeding with fits and starts, freight volume is still on the rise, particularly in intermodal or container traffic, which is growing by nearly 10%. Better yet, railroads are gaining market share from their biggest rivals – trucking companies.
But when everything’s coming up roses, wise investors sniff around for the manure pile. The skunk at the railroad industry’s garden party popped up last week in the form of an antitrust lawsuit against two major players – Union Pacific (NYSE:UP) and Berkshire Hathaway’s (NYSE: BRKA) Burlington Northern Santa Fe.
Oxbow Mining, which mines and ships coal, oil and natural gas, alleges that the freight rail companies have conspired to fix prices on shippers. Oxbow claims it has paid more than $30 million in fuel surcharges, which are illegal under the Sherman Antitrust Act.
Meanwhile, the railroads hold that the Staggers Act, which deregulated the freight rail industry in 1980, allows them to establish shipping contracts – and rates – without review by federal regulators.
The outcome of antitrust lawsuits (which can carry triple damages) is always a dicey proposition to predict. After all, those who believed AT&T (NYSE:T) was too big to bow to the courts eventually stood corrected. But even though freight railroads are in the crosshairs of antitrust lawyers, now is not the time for investors to run for cover. Here are 4 winning rail stocks to consider for your portfolio:
- CSX (NYSE:CSX). On Thursday, we’ll see the 3-1 stock split CSX announced in May. The biggest deal about that is in the perception that CSX shares have suddenly become much more affordable to investors. The market cap will remain a hair under $27 billion, but the split will boost liquidity. At $73.30, the stock is trading nearly 58% above its 52-week low and pays a dividend yield of 1.9%.
- Kansas City Southern (NYSE:KSU). KSU is a strong performer which beat analysts’ first-quarter earnings and revenue forecasts. The company is experiencing strong growth in its intermodal business. Although the slowdown in auto production might affect the numbers a bit in the short term, KSU should rebound down the stretch. At $51.81, KSU is 63% higher than its 52-week low last August.
- Norfolk Southern (NYSE:NSC). NSC has benefited greatly from the recent strong growth in coal shipments. The company boosted its capacity last month by adding 1,500 new coal cars. Last week, the company broke ground on a new $97.5 million intermodal facility near Birmingham, Ala., that will be the first stop out of New Orleans. The stock price is $70.59 — 41% higher than its 52-week low. It doesn’t hurt that the stock has a dividend yield of 2.3%.
- Union Pacific. Yes, they’re under the antitrust microscope and that’s always enough to give investors pause. But at $100.64, the stock price is more than 50% higher than its 52-week low last July. The fundamentals are strong with quarterly earnings growth of nearly 24% and a 1.9% dividend yield.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.