Monday was a normal day for the market, more or less, but one sector that’s been flying under everyone’s radar stood out in the middle of the session: railroads.
Midday, shares of Norfolk Southern (NSC) spiked along with all its rivals, including Canadian Pacific Railway (CP), which is said to be considering making a bid for its American counterpart. This kind of scuttlebutt isn’t new, as Canadian Pacific CEO Keith Creel has made it clear that he’s on the prowl. Most recently, it was reported that CSX Corp. (CSX) rebuffed his offers.
Longer term, the rails interest me because of the Panama Canal expansion, which is expected to double the capacity of the canal with a new lane of traffic that will allow for larger ships to pass through. (I talked about my favorite long-term pick in the sector in a Smart Talk article back in May.) Ships that can carry more containers should be a boost for the railroads that bring those containers to port.
Train cars have been carrying relatively lighter loads lately, due mostly to weak commodity prices, so there’s been a lot of talk about big-scale mergers to tie the industry together and keep the gears running smoothly. But no one has made any definite moves yet.
CP’s 6% pop reflects just how excited people are at the idea of a merger, even if there isn’t anything set in stone. If CP and NSC were to consolidate, the deal would lead to over 33,700 miles of track being created, improving connectivity between the U.S. and Canada and pandering to the increased production of oil and demand for other consumer goods.
A merger would bring together the East coast footprint of Norfolk Southern and the West coast footprint of Canadian Pacific, which happens to be backed by activist hedge fund manager Bill Ackman. Overall, such a deal would send a positive message about the future of the economy.
CP has fallen over 8% in the past month, so it’s hard to commit to as a standalone investment, even as a potential long-term play. I’ll be keeping my eye on the company as merger talks continue, but don’t hold your breath. After all, even if a merger were announced tomorrow, it could take up to two years before the deal is finalized and we see some real money flowing into the name.
But let me emphasize that the road ahead isn’t totally clear. CP closed out the third quarter with $506 million in cash but over $8 billion of debt — a weak position that will make it much harder for the company to chase down an NSC acquisition.
One thing is for sure, the rails have been shellacked from Obama’s war on coal. And the U.S. railroad industry hasn’t seen a major acquisition since Warren Buffet nabbed Burlington Northern Sante Fe for $44 billion back in 2010, so it’s high time for the leaders in the sector to take some drastic steps toward revitalizing the industry.
Keep in mind that the transportation names have been a precise harbinger of things to come, stalling into the start of the year and heading south before the broad market began to get hit, so it’s an area of the market worth paying attention to.
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