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3 Railroad Stocks to Ride Now

Intermodal growth, petroleum products offset declining coal volumes

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railroad stocks, csxOn Tuesday, CSX (CSX) posted strong second-quarter earnings of 53 cents a share on a top line of about $3.2 billion. Revenue grew 6.5% in the quarter, in large part because of strong performance in transport of petroleum products, grain, construction products and intermodal. Although the railroad’s declining coal volumes continued to drag shipping volumes, net profits still increased overall by 2%. The results beat analysts’ profit expectations and narrowly missed revenue targets.

CSX is investing strategically in its business, setting aside an additional $100 million for capital investment this year — bringing the total capital investment to $2.4 billion. The capital investment is being used to purchase new, more rugged tank cars to haul petroleum products and to develop intermodal infrastructure.

The biggest boon for railroad stocks in general — and CSX in particular — has been growth in transporting shale oil and other petrochemical products from fracking operations in North Dakota’s Bakken shale formation and elsewhere. Consider that major railroads delivered 434,042 carloads of crude oil in 2013 — 83% higher than the prior year, according to the Association of American Railroads.

CSX stock has gained more than 8% year-to-date, and the fundamentals look solid. Although CSX’s price-to-earnings-growth (PEG) ratio is 1.6, suggesting the stock may be overvalued, it has a forward P/E of 14.5 — about average for the sector. CSX stock has a current dividend yield of 2.1%.

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