With rumors of a possible Berkshire-owned BNSF Railway expansion, let’s look at other major railroad companies with potential for future partnerships. BNSF operates in the western US. So, we’ll look at one company in Canada, and two East Coast leaders. The rail companies are: Canadian National Railway (USA) (NYSE:CNI), CSX Corporation (NYSE:CSX), and Norfolk Southern Corp. (NYSE:NSC).
Canadian National Railway (USA) (NYSE:CNI) maintains a small economic moat because it’s the largest railway company in Canada, owns a route down the Mississippi, and is present in most segments. The company is in the best position to benefit from growing potash demand and mining in the Yukon. The stock is also undervalued, offering long-term investors a good chance to make a buck.
With a focus on efficiency, speed improvement, and fuel efficiency, Canadian National Railway (USA) (NYSE:CNI) continues to increase transported volumes. That’s in part why the firm holds the highest operating margin in North America, and revenues have risen steadily with higher demands for the oil, car, and intermodal segments. Also, recent long-term contracts have secured the steady future demand for the fertilizer segment, while management keeps focusing on cost reduction. All that has resulted in stronger financial indicators over time and a stronger balance sheet.
Looking at financial indicators, Canadian National Railway (USA) (NYSE:CNI)’s revenues, net income, and free cash have risen since 2009. Debt has has been reduced since 2008, and its operating margin is the highest in the industry at 37.10%. Management initiatives have taken return on equity to a historical high, while EBITDA has taken a small step backward.
Currently trading at 16.7 times its earnings, at a slight discount to the 17.5 times industry average, the stock is fairly valued. With rising dividends and yield – today at, $0.43 and 1.64% each – Canadian National Railway (USA) (NYSE:CNI) is a recommended buy for the long-term investor.
Domestic market: Stock #1
Norfolk Southern Corp. (NYSE:NSC) holds a potential partnership with BNSF Railroad due to geographic presence (East Coast). Additionally, the firm is benefiting from America’s economic recovery, while reducing exposure to the coal segment. But, in comparison with CSX Corporation (NYSE:CSX), the firm has not arrived to Florida yet.
In the second quarter, Norfolk Southern Corp. (NYSE:NSC) reported a 2% increase year to year in volume. The rise was primarily driven by the chemicals (10%), intermodal (9%), and automotive (2%) segments. Besides the coal segment, agriculture (3%) and metals (6%) have also seen a slowdown. The moderate cuts on these segments represent a direct market-share increment for its main competitor.
Financially, Norfolk Southern Corp. (NYSE:NSC)’s revenue and net income have seen a steady rise the last four years, providing the necessary free cash for infrastructure. Four corridors have seen improvements, while a new terminal has been inaugurated in Knoxville, and another is expected to open next year. Operating margin is nine points lower than Canadian National Railway (USA) (NYSE:CNI)’s 37.10%, and the debt level has been on the rise.
Similar to CSX Corporation (NYSE:CSX), Norfolk Southern Corp. (NYSE:NSC) is trading at a 25% discount to the 17.5 times industry average, but triples its price tag. Yield is higher than CSX Corporation (NYSE:CSX) at 2.75%. I recommend to buy, because structural investments will give the company an important competitive edge.