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Union Pacific Corporation (UNP), CSX Corporation (CSX): Six Reasons to Invest in This Railroad

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Union Pacific Corporation (NYSE:UNP)When investing in a publicly traded business you want that company to maintain its ability to generate and grow free cash flow over the long term. Western railroader Union Pacific Corporation (NYSE:UNP) possesses the qualities to make that happen.

Barriers to entry

If new competitors want to enter the railroad arena they would need to spend billions of dollars to build infrastructure such as rail bridges and tunnels, not to mention regulatory approval and the acquisition of land to lay track. This provides a pretty wide moat for Union Pacific Corporation (NYSE:UNP).

Lack of railroad competition

Union Pacific Corporation (NYSE:UNP) only faces one major competitor on the western front: Berkshire Hathaway’s Burlington Northern Santa Fe. This gives Union Pacific Corporation (NYSE:UNP) greater ownership of the lucrative railroad market allowing the company greater leverage in capitalizing on the recovering American economy.

Pricing power

Lack of competition gives Union Pacific Corporation (NYSE:UNP) the ability to raise prices when necessary. Considering the company’s volume declined 1% during the most recent quarter, this represents one of those times. Union Pacific Corporation (NYSE:UNP) still reported a 5% increase in freight revenue due to gains in pricing during the same quarter.

Even revenue stream

Unlike other railroads Union Pacific draws in a fairly even revenue stream from each of its segments and doesn’t need to lean too heavily on one particular segment. Union Pacific’s segment distribution in terms of percentages of revenue include intermodal, industrial products, coal, chemicals, agriculture, and automotive clocking in at 19%, 19%, 19%, 17%, 15%, and 10% of total revenue, respectively.

Other railroads experience heavy concentration in one particular segment. For example, Midwestern company Kansas City Southern (NYSE:KSU) derives the highest amount of its revenue from its industrial and consumer products division at 25%. Its next highest segment, chemicals and petroleum, comprises 19% of its revenue, a 6% drop. The housing recovery should bode well for this company stemming from the fact that forest products makes up 46% of the industrial and consumer products division.

Eastern railroader Norfolk Southern Corp. (NYSE:NSC) derives the largest portion of its revenue from coal, standing at 22% of its revenue. CSX Corporation (NYSE:CSX)derives 31% and 25% of its revenue from the industrial and coal segments, respectively. Revenue growth of these companies will remain constricted as long as natural gas remains relatively cheaper than the price of coal.

Low operating ratio

Greater diversity in revenue streams and lack of competition gives Union Pacific a better opportunity to keep its trains going, allowing the company to leverage its expenditures into more revenue.

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