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3 Railroad Stocks to Ride Now

Intermodal growth, petroleum products offset declining coal volumes

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Union Pacific (UNP)

Unionrailroad stocks, union pacific Pacific (UNP) is the grand-daddy of freight railroads in the U.S., boasting diversified freight contracts that include intermodal, chemicals, coal, agricultural, and automotive business. When UNP reports earnings on July 24, Wall Street is looking for earnings of $1.46 per share and revenue of a little less than $6 billion for UNP’s fiscal second quarter.

The railroad’s growth in the all-important intermodal freight sector will be an important locomotive for UNP stock. Intermodal freight, which is packed in containers and can be moved by truck, rail or ship, is a winning play for railroads. Last month, Intermodal volume grew by a whopping 6.7% in June to more than 269,000 container units — the highest volume in history, according to the Association of American Railroads.

Against the backdrop of tighter trucking capacity, railroad stocks are poised to build on recent gains. Like rival BNSF, UNP’s strong position in the key West Coast ports of Oakland, Calif. and Portland, Ore. gives the railroad an edge. Last month, UNP increased its premium intermodal services from the West Coast to Chicago and it is moving forward with commitments to invest $4.1 billion to improve infrastructure in 2014.

UNP stock has gained more than 20% year-to-date and still has room to run. Although UNP’s PEG ratio of 1.2 and its forward P/E of 16 suggest the stock could be overvalued, earnings growth and a current dividend yield of 1.8% further sweeten UNP’s value proposition.

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