Many of us got our first exposure to railroad stocks by playing Monopoly. The $200 cost to purchase each of the four proved to be one of the board’s fairly lucrative investments. “Rent” started at $25, then doubled for every other railroad owned on the board.
The game board aside, railroads aren’t flashy or exciting. Many investors refer to railways as “old economy” companies and claim they are outdated in today’s internet-driven economy. But railroads are still a key transportation artery in North America and Europe, and stocks of railway companies remain a solid and dependable if unspectacular investment.
Most railroad stocks also pay healthy dividends to shareholders and several companies in the sector are engaged in share buyback programs that help to elevate the share price and are beneficial to investors.
While most railroad stocks declined during the pandemic as demand for their services waned, they look ready for a rebound now as the economic reopening goes into full force and shipping over land accelerates.
While there’s no Reading Railroad or Short Line on our list, here are three railroad stocks to board before a breakout.
Railroad Stocks to Board Before a Breakout: Canadian Pacific Railway (CP)
Few railroad stocks are as well-positioned for growth and a coming breakout as Canadian Pacific Railway (CP Rail). The Calgary, Alberta-based company won in September a protracted battle to acquire Kansas City Southern (NYSE:KSU) and create a rail network that, for the first time ever, will span all of North America — the U.S., Canada and Mexico.
CP Rail secured the victory to acquire Kansas City Southern after rival railway operator Canadian National Railway (CN Rail) gave up its rival takeover offer. CP Rail is buying Kansas City Southern for $90 a share and 2.884 shares of CP stock. The deal is expected to close in the the second half of 2022.
Once shareholder and regulatory approvals are secured and the acquisition finalized, the combined railways will be renamed “Canadian Pacific Kansas City,” and will retain its global headquarters in Calgary, Canada.
The purchase of Kansas City Southern fulfills a long held desire of CP Rail’s management to create a trans-continental rail network that covers all three North American countries. The merged rail companies will operate 20,000 miles of track, employ nearly 20,000 people, and generate annual revenues of about $9 billion.
CP Rail appears ready for a breakout. In the last six months, CP stock has risen only 3% to its current price of $77.27 a share.
Norfolk Southern (NSC)
Norfolk Southern is another rail stock that could use a lift. In the last six months, the NSC stock price has only gained 2% and continues to hover around $288 a share.
While the stock is up 23% year-to-date, most of that gain came in the first quarter. Since then, the stock has been moving in fits and starts, but largely trading sideways.
The Norfolk, Virginia-based company just reported strong third-quarter results that showed its revenue grew 14% to $2.85 billion compared with the third quarter of 2020. Income from railway operations in the Q3 reached a record $1.1 billion, a 35% increase year-over-year.
While the financial results were solid, they failed to move the needle on NSC stock in a significant way. This is largely due to ongoing concerns about rising costs that could hit Norfolk Southern and other railways. These costs include higher prices for the two biggest inputs that railways face: fuel and employee wages.
However, demand for railroads and shipping items by rail is expected to rise as the economic recovery gathers steam, which should put Norfolk Southern and its stock in a good position for future growth.
NSC stock reached its all-time high of $296.06 a share in May before the recent sell-off. However, it might not be long before this railroad’s stock breaks out again.
Railroad Stocks to Board Before a Breakout: Union Pacific (UNP)
Shares of Omaha, Nebraska-based Union Pacific has fared a little better than the other railways on this list having risen 7% to $239.29 in the last six months.
However, like other railroad companies, UNP stock’s gains have trailed those of the S&P 500 index, which is up 10% over the same time frame.
Union Pacific has recently received some good news in the form of two analyst upgrades to its stock. Both JPMorgan Chase and Barclays each raised their ratings on the railway and urged investors to buy the stock, saying they expect the railroad industry to rebound in 2022 as supply chain issues are resolved and demand for shipping over land rises.
Union Pacific recently reported solid Q3 results that showed its operating revenue amounted to $5.6 billion, up 13% from a year earlier. The company’s net profit jumped 23% to $1.67 billion. Plus, Union Pacific announced a commitment to pay 45% of its future earnings as a dividend to shareholders. That dividend commitment alone should be enough to entice investors to this railway, which has 30,000 employees and annual revenues of $20 billion.
Unfortunately, the company cuts its full-year volume growth target to 5% from 7% in July and reduced targets for productivity gains and its operating margin going forward.
While that lower guidance might hurt UNP stock in the near term, the long-term story remains very compelling.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.