Union Pacific Corporation (UNP): This Railroad Stands Out from the Others

Finally, Norfolk Southern Corp. (NYSE:NSC) has managed a respectable 6% return on assets over the last decade. Like Kansas City Southern, Norfolk Southern utilizes a business model that should provide an above-average return on assets. Instead of concessions, though, Norfolk Southern has invested heavily in its intermodal segment, which has historically earned outsized returns on invested capital. As a result, Norfolk Southern is one of the best-performing railroads.

Union Pacific Corporation (NYSE:UNP) and Norfolk Southern are able to earn high returns because of the nature of the industry. Railroads operate only where they own track or have the right to operate on a given track; this has led to monopolies or near-monopolies in most markets. As a results, multiple railroads can thrive at the same time.

However, although Norfolk Southern is a high-performing business, Union Pacific’s return on assets is higher and will likely improve even more in the years ahead. In addition to having a relatively large number of contracts up for renewal during a favorable pricing environment, Union Pacific has a lower exposure to coal than Norfolk Southern. Coal is under pressure from low natural gas prices and environmental regulations, which will likely depress coal shipments even further in the years ahead.

To top it off, Union Pacific Corporation (NYSE:UNP) maintains a healthier balance sheet than Norfolk Southern, which will allow it to return more capital to shareholders instead of having to pay down debt. As a result of these factors, Union Pacific Corporation (NYSE:UNP) is a better railroad than Norfolk Southern in its operations and its capital allocation.

Bottom line

Investors should always tailor their analysis based on what is most relevant to each individual company they investigate. In the railroad industry, return on assets tells us more about how well-run a business is than any other metric. Therefore, investors should focus on paying a given multiple of assets based on a company’s return on assets. Of course, the bull market and railroad boom has inflated railroad stock prices to unattractive multiples of assets, so long-term investors should patiently wait for prices to come back down to a bargain level.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article This Railroad Stands Out from the Others originally appeared on Fool.com.

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