Shrewd investors looking for a nice play in the transportation sector need look no farther than the railroad industry. True, the 180-year-old sector doesn’t boast the flash of today’s high-tech darlings.
You’ll just have to settle for the cash instead. Railroad freight volume is on the rise — up 5.3% in the first quarter of this year.
And the full-year outlook is pretty strong for companies like Union Pacific (NYSE:UNP), CSX (NYSE:CSX) Kansas City Southern (NYSE:KSU) and Norfolk Southern (NYSE:NSC). Shares of all these companies have been on a tear since their 52-week lows last summer. Union Pacific is up 49%, CSX is up 69%, Norfolk Southern has risen more than 38% and Kansas City Southern is up a whopping 71%. So is it mere coincidence, or is it that (as the old Amtrak jingle goes) “There’s something about a train that’s magic”?
The answer in this case is neither – it’s all about the fundamentals and the alternatives. There’s a lot of good news about railroads, which can carry one ton of freight 436 miles on a single gallon of diesel fuel – dramatically better than other modes like air freight or trucking companies.
And in this time of high oil prices and the ongoing risk of supply volatility (particularly in the crisis-ravaged Middle East) more bang for the fuel buck a pretty big deal. In fact, the railroad industry has boosted fuel efficiency by a whopping 85% since 1980 by buying more efficient locomotives and giving engineers better training on how to conserve fuel.
However, the rail industry currently commands only about half the total volume of domestic freight. That means there’s plenty of upside to increase its piece of the action — likely at the expense of truckers. Rail freight also benefits from increases in inter-modal container shipping volume, which has been growing by 8% or better every year.
And for a legacy industrial sector, railroads haven’t been shy about investing in newfangled technology. These days, computers are playing a huge role behind the scenes in freight rail operations: aiding in the process of trip planning, reducing the amount of engine idling and assembling trains in the rail yard. By automating manual, error-prone and time-intensive processes ranging from routing to bill of lading and invoice management, the industry has been able to squeeze out costs while boosting efficiency – and safety.
Freight railroads received another gift in early March when the Federal Railroad Administration dialed back their part of a massive $13.2 billion safety law. The law would have required all trains by 2015 to be fitted with Positive Train Control anti-collision technology, which would automatically stop the train if the operator blows through a stop signal. The railroads fought the lawmakers and won – a victory that could save them some $500 million.
Bottom Line: Freight rail offers more upside than any other mode of domestic shipping right now. The trucking industry is fighting a multi-front war these days against the impact of higher fuel, new government regulations and a potential driver shortage. Air cargo has always been a pricier option for shippers – and those prices will rise further with oil prices bouncing around the $105/barrel range.
The headwinds for rail freight are the same for the rest of the space: primarily risks that the economy will retreat or that Japan crisis-driven supply chain disruptions could delay new vehicle shipments. But for now, railroads are a good play for investors seeking positive alpha in the near term.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
