Canadian Pacific Railway Limited (USA) (CP), Norfolk Southern Corp. (NSC): All Aboard the Oil Train – Which Company is Best Positioned to Capitalize on Surging U.S. Oil Product

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Oil production in the United States has moved sharply higher in recent years due to high crude oil prices and technological advances in the extraction of petroleum. Much of this new capacity resides in states such as: North Dakota, Montana, Pennsylvania and Ohio; requiring land transportation to deliver the crude oil to refining facilities located elsewhere. While pipelines are one method to transport oil, another method is rail with the number of crude oil containing railcars expanding rapidly over the past few years. This shift is a boon for railroads and manufacturers of railcars representing a compelling bullish thesis. Several companies well situated to capitalize on this trend are presented below.

Canadian Pacific (NYSE:CP) operates over 14,700-miles of railway that serve the principle centers of Canada and the U.S. Midwest and Northeast. This geographical focus allows the company to deliver oil from both the Bakken shale and Canada’s oil sands, constituting a considerable competitive advantage. Oil contributes 6% to the company’s bottom line; however, the present valuation of the company seems rather rich at 37.5 times TTM earnings. While, analysts project sizable earnings growth of 23.93% over the next year, the valuation of Canadian Pacific Railway Limited (USA) (NYSE:CP) seems higher than warranted by historical earnings growth.  Over the past five years the average price-to-earnings multiple has been 18.05 (Table 1), nearly half the present valuation.  Assuming that this sizable growth does come to pass, Canadian Pacific Railway Limited (USA) (NYSE:CP)'s PEG ratio is still a rather lofty 2.05, thus waiting for a better price seems justified at the present time.

Canadian Pacific Railway Limited (USA) (NYSE:CP)

Norfolk Southern Corp. (NYSE:NSC) operates a 20,000-mile railway network, most of which is east of the Mississippi and runs nearly the entire length of the United States from north to south. While Norfolk Southern Corp. (NYSE:NSC) has some exposure to oil in Pennsylvania and Ohio, the company’s earnings declined by 8.7% year-over-year as Norfolk Southern is quite exposed to declining coal shipments, which comprise 20% of revenues. Norfolk Southern Corp. (NYSE:NSC) declined to the mid-$50 per share range last year as a result of investor disappointment, but has recovered since.

While the company is shareholder friendly with a generous dividend and buyback program it seems unlikely that Norfolk Southern Corp. (NYSE:NSC) will be able to outperform, as weakness in coal shows no sign of abating. The current share repurchase program is in effect until the end of 2014 and Norfolk Southern Corp. (NYSE:NSC) has consistently bought back shares to lower its float by 16% over the past five years.  The company also pays a 2.75% dividend at the present price.

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