In this article we will take a look at the 10 best railroad stocks to buy in 2021.
Since the start of the 18th century when the first steam engine was invented, the railroad industry has come a long way expanding across the world with over 1.3 million route kilometers worldwide as of 2020. It has become a global industry and is one of the cheapest means of transportation for cargo as well as people. The longest rail network in the world is in the United States which is closely followed by Russia, China, Canada, France, India, and Germany. According to the Business Research Company, the global rail transport market is expected to grow from $468.7 billion in 2020 to $519.3 billion in 2021 at a CAGR of 10%. This growth is likely to be due to leading railroad companies that are rearranging their operations and are taking proactive steps to recover from the impact of the COVID-19 pandemic which led to the closure of commercial activities across the world.
Different factors such as increased budget for railway infrastructure development and increased demand for safer and more efficient transport systems is expected to drive the growth of the railway industry. Additionally, greater use for public transport services to minimize traffic congestion in large cities will also help to propel the growth of the industry. According to Allied Market Research, developing countries like India and China are focusing towards the development of their railway infrastructure by allocating a higher budget for its development. Similarly, various countries across the globe are continuously increasing their rail budget to deploy latest technologies and improve their infrastructure. For example, Canadian National Railway Company (NYSE: CNI) has announced an investment of $2.92 billion in the province of Saskatchewan to develop the railroad infrastructure in the area.
Image by WikiImages from Pixabay
The Railroad Industry in the US
In 2020, the US rail transportation market was valued at $181.5 billion. The railroad industry in the country took a huge hit during the start of 2020, however, the industry is slowly recovering from the slump. According to a report by the Association of American Railroads, total U.S. rail traffic for the week ended Mar 6, was 515,135 carloads and intermodal units, which shows an increase of 11.4% from the same week of the previous year. Moreover, total carloads were up by 1.1% year-over-year while intermodal volume was up by 21.5%. According to a report by the Bureau of Transportation Statistics, railroad moved $14.1 billion of freight in December, showing an increase of 1.6% compared to November 2020. The ongoing vaccination drive in the country will also add more fuel to the railroad industry which is reflected in a Moody’s report published on October 29, 2020. Moody’s has upgraded its outlook for the North American railroad transportation from negative to stable due to expected growth in shipments of most types of freight over the next year. Such positive developments make the railroad industry an exciting opportunity for investors.
Many railroad companies are finding new opportunities due to this upsurge in the railway sector. For example, the Norfolk Southern Corporation (NYSE: NSC) has recently issued green bonds in an effort to address the environmental concerns of rail transport by using the funds generated to invest in greener alternatives and minimizing carbon emissions from their operations. Moreover, Canadian Pacific Railway Limited (NYSE: CP) and Kansas City Southern (NYSE: KSU) have announced an agreement to combine and create the first rail network connecting the U.S., Mexico and Canada. By 2025, this industry is expected to be worth $658.9 billion at a CAGR of 6%.
As the US economy grows, the demand for freight transportation will also increase. The Federal Highway Administration has forecasted that total U.S. freight shipments will rise from an estimated 18.6 billion tons in 2018 to 24.1 billion tons in 2040 which is a 30% increase. Railroad companies across the world are getting ready today to meet this challenge. Rail transport has become one of the safest means of transportation globally. Railroads are constantly developing and implementing new technologies to address safety challenges. Since 2000, train accident are down by 35% while hazmat accident rates are down by 64%. Moreover, the rail employee injury rate also hit an all-time low in 2020.
Companies like Union Pacific Corporation (NYSE: UNP) and CSX Corporation (NASDAQ: CSX) are leading the railroad industry with their vast rail networks and freight management capabilities. Many other companies are also following their tracks and are involved in exciting projects that will open the door towards safer and quicker rail transportation services. This will also help in boosting trade across regions and ultimately the economy as a whole.
Like the railroad industry, the hedge fund industry is also going through massive changes. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context and industry outlook in mind, let’s start our list of 10 best railroad stocks to buy in 2021.
Best Railroad Stocks to Buy in 2021
10. USD Partners LP (NYSE: USDP)
Market Cap: $170.332 million
Number of Hedge Fund Holders: 2
USD Partners LP (NYSE: USDP) is a Texas-based railroad company that acquires, develops, and operates midstream infrastructure and logistics solutions for biofuels, crude oil, and other energy related products in the United States and Canada. The company is divided into two segments: terminalling services and fleet services. As of 2020, USD Partners has a fleet of 1432 railcars across US and Canada. USD Partners LP (NYSE: USDP) announced its earnings in the first quarter of 2021. USD Partners LP reported a net income of $7.3 million with adjusted EBITDA amounting to $14.6 million and a distributable cash flow of $12.5 million at the end of the quarter. Furthermore, the company also announced that its management intends to recommend to the Board of Directors of the Partnership’s general partner to increase the quarterly cash distribution per unit by an additional $0.0025 per quarter for each of the second, third and fourth quarters in 2021 as compared to the preceding quarter. Dan Borgen, USD’s CEO said that he is pleased to report a strong start to 2021 as their strategically located terminals have continued to perform well. The company has also improved its outlook for 2021 due to its enhanced liquidity position making it one of the best railroad stocks to buy in 2021.
USD Partners LP ranks 10th in the list of best railroad stocks to buy in 2021.
9. Greenbrier Companies, Inc. (NYSE: GBX)
Market Cap: $1.499 billion
Number of Hedge Fund Holders: 15
The Greenbrier Companies, Inc. (NYSE: GBX) is headquartered in Lake Oswego, Oregon and was founded in 1974. It designs, manufactures, and markets railroad freight car equipment in North America, South America, and Europe. The company serves railroads, financial institutions, leasing companies, transportation companies, carriers, and shippers. Although Greenbrier’s bottom line has been affected by the COVID-19 pandemic, the company has maintained a strong balance sheet with plenty of liquidity throughout this challenging time. Greenbrier reported cash of approximately $600 million as of Feb. 28, 2021 along with additional borrowing capacity of $115 million.
The Greenbrier Companies, Inc. ranks 9th in the list of best railroad stocks to buy in 2021.
The Greenbrier Companies, Inc. is also taking initiatives to free up another $100 million in liquidity. The CEO of the company, William Furman, shared a positive near-term outlook for the company owing to improving rail fundamentals. Greenbrier’s incoming orders are a lot better than its previous sales numbers. In the first quarter of 2021, new orders for 3,800 new railcars with a value of $440 million came in. Greenbrier is expecting the second half of fiscal 2021 to be stronger than the first half. In the longer term, the company expects environmental regulations in Europe and North America to benefit the rail freight industry. The Greenbrier Companies, Inc. also announced plans to form GBX Leasing, which will be a joint venture with The Longwood Group. The Longwood Group is an asset management and transport equipment advisory firm which will help develop GBX Leasing’s portfolio of leased railcars built by Greenbrier. The company is on track to recovery making it one of the best railroad stocks to buy.
8. Trinity Industries, Inc. (NYSE: TRN)
Market Cap: $3.11 billion
Number of Hedge Fund Holders: 22
Trinity Industries, Inc. (NYSE: TRN) was incorporated in 1933 and is headquartered in Dallas, Texas. It provides rail transportation products and services in North America and operates through three segments: Railcar Products Group, Railcar Leasing and Management Services Group. The company has announced a quarterly dividend of $0.21 per share on its $0.01 par value common stock. The quarterly cash dividend, represents the company’s 229th consecutively paid dividend which is payable to stockholders on July 15, 2021.
Like Canadian National Railway Company, Norfolk Southern Corporation, Canadian Pacific Railway Limited, Union Pacific Corporation and CSX Corporation, TRN is one of the best railroad stocks to buy now. It ranks 8th in the list of best railroad stocks to buy in 2021.
In its latest earnings report, Trinity Industries, Inc. declared a quarterly earnings of $0.07 per share compared to $0.11 a year ago. The total revenue was $398.8 million in the quarter ended March. The company expects its earnings to improve in 2021 from a year ago as it has employed several cost-saving initiatives. Trinity estimates cash flow from operations in the range of $625 million to $675 million for fiscal year 2021.
7. Westinghouse Air Brake Technologies Corporation (NYSE: WAB)
Market Cap: $14.734 billion
Number of Hedge Fund Holders: 45
Westinghouse Air Brake Technologies Corporation (NYSE: WAB) provides technology-based equipment, systems, and services for the rail and passenger transit vehicle industries around the world. It works through two segments: Freight and Transit. Headquartered in Pittsburgh, Pennsylvania, Westinghouse Air Brake Technologies Corporation (NYSE: WAB) reported its first quarter earnings for 2021 which amounted to $0.59 per diluted share compared to $0.58 in the previous year and adjusted earnings per diluted share were reported to be $0.89 compared to $0.97 a year ago.
Westinghouse Air Brake Technologies Corporation ranks 7th in the list of best railroad stocks to buy in 2021.
In the first quarter of 2021, Westinghouse Air Brake Technologies Corporation had cash from operations of $292 million, sales of $1.8 billion and GAAP earnings per diluted share of $0.59. Sales were $1.8 billion versus $1.9 billion in the same period a year ago. This slight decrease compared to the previous year quarter was due to lower sales in freight equipment. However, it was partially offset by growth in freight services. Westinghouse Air Brake Technologies Corporation has also completed its acquisition of Nordco for $400 million as part of its freight services group. WAB has had a strong start to 2021 and is expected to maintain this momentum throughout the year making it one of the best railroad stocks to buy now.
6. Kansas City Southern (NYSE: KSU)
Market Cap: $27.808 billion
Number of Hedge Fund Holders: 49
Kansas City Southern (NYSE: KSU) is a transportation holding company which provides domestic and international rail transportation services in North America. The company was founded in 1887 and is headquartered in Kansas City. It has a rail network of approximately 7100 route miles that extends from the Midwest of the United States till the south into Mexico. Kansas City Southern is a prominent name in the railroad industry with a market cap of $27.808 billion.
Like Canadian National Railway Company, Norfolk Southern Corporation, Canadian Pacific Railway Limited, Union Pacific Corporation and CSX Corporation, KSU is one of the best railroad stocks to buy now.
In the first quarter of 2021, KSU reported a revenue of $706 million which is a 4% decrease from the previous year resulting from lower fuel surcharges and fluctuations in foreign currency. The first quarter net income was $153.4 million, or $1.68 per diluted share. Kansas City Southern also announced an combination with Canadian Pacific Railway Limited (NYSE: CP) to create the first rail network that will connect the US, Canada, and Mexico. This rail network will be the first to link the three countries and will be a competitive alternative to the current rail service providers.
KSU ranks 6th in the list of best railroad stocks to buy in 2021.
At the end of the fourth quarter of 2020, 49 hedge funds in the database of Insider Monkey held stakes worth $1.02 billion in Kansas City Southern which is a decrease from 53 hedge funds in the preceding quarter holding stakes worth $1.07 billion.
Best Railroad Stocks to Buy in 2021
5. Canadian Pacific Railway Limited (NYSE: CP)
Market Cap: $52.588 billion
Number of Hedge Fund Holders: 24
Canadian Pacific Railway Limited (NYSE: CP) operates a transcontinental freight railway in Canada and the United States. The company provides rail and intermodal transportation services through a rail network of 13,000 miles expanding across several business centers in British Columbia, Quebec, and the Northeast and Midwest regions of the US. Canadian Pacific Railway Limited was founded in 1881 and is headquartered in Calgary, Canada. With a market cap of $52.588 billion, Canadian Pacific Railway Limited (NYSE: CP) has earned the 5th spot in Insider Monkey’s 10 best railroad stocks to buy in 2021 list.
In the earnings report for the first quarter of 2021, CP reported a revenue of $1.96 billion with a diluted EPS of $4.50 which is a 51% increase from $2.98 in the preceding year. Reported OR increased by 100 basis points from 59.2% in Q1 of 2020 to 60.2% in Q1 of 2021. This strong momentum in the beginning of fiscal year 2021 presents unique opportunities for CP as demand recovers from the COVID-19 pandemic. The full year outlook is mostly positive with an estimated double-digit diluted EPS growth and capital expenditures of $1.55 billion.
4. Norfolk Southern Corporation (NYSE: NSC)
Market Cap: $70.833 billion
Number of Hedge Fund Holders: 44
Norfolk Southern Corporation (NYSE: NSC) is a Virginia-based company that is involved in the transportation of raw materials, intermediate products, and finished goods by rail within the United States. It also transports overseas freight through Atlantic and Gulf Coast ports as well as commuter passenger services. As of December 31, 2020, the company operated approximately 19,300 route miles in 22 states and the District of Columbia. Norfolk Southern Corporation expected earnings growth year for fiscal year 2021 is 19.7% which makes it an ideal choice for investment.
Recently, NSC closed a $500 million green bond offering to fund investments in order to reduce the company’s carbon emissions and help customers reduce their supply chain emissions. Norfolk Southern is the first Class I railroad in North America to issue green bonds earning it a top spot in the 10 best railroad stocks to buy in 2021. Over the past four quarters, the company has surpassed consensus EPS estimates four times. Its first quarter earnings in 2021 amounted to $2.66 per share as income from railway operations increased 7% year over year to $1.015 billion.
3. CSX Corporation (NASDAQ: CSX)
Market Cap: $76.906 billion
Number of Hedge Fund Holders: 58
CSX Corporation provides freight transportation via rail as well as rail-to-truck transfers and bulk commodity operations. The company also provides intermodal transportation services through a vast network of 30 terminals. CSX Corporation currently operates a rail network of 19,500 route miles. It was founded in 1978 and is based in Jacksonville, Florida.
The company recently announced that it has signed an agreement to acquire Quality Carriers, Inc. which is the largest provider of bulk liquid chemicals truck transportation in North America. CSX’s recent quarterly earnings report showed that the company’s earnings per share decreased 7% year-over-year to $0.93 in the first quarter of 2021. The total revenue in 2020 was reported to be $10.5 billion from $11.9 billion in 2019. Although the company’s revenue declined by 1%, CSX is expecting their profit for fiscal year 2021 to grow by 39% as the company has managed to increase their velocity by more than 30% and has created excess capacity to limit how long fluid trains sit idle. On May 7, 2021, the Board of Directors of CSX approved a $0.28 per share quarterly dividend on the company’s common stock which is payable on June 15, 2021. The future of the company seems bright with a higher cash flow on the cards for CSX making it one of the best railroad stocks to buy in 2021.
2. Canadian National Railway Company (NYSE: CNI)
Market Cap: $78.437 billion
Number of Hedge Fund Holders: 31
Canadian National Railway Company (NYSE: CNI) operates a network of 19,500 route miles of rail track spanning across the United States and Canada. It also operates vessels and docks, automotive logistics, transportation management services and freight forwarding services. The company was founded in 1919 and is headquartered in Montreal, Canada. Long term shareholders of Canadian National Railway Company have enjoyed a 79% share price increase over the past 5 years. It is the largest railroad company in Canada and has maintained its top position over the years making it one of the best railroad stocks to buy now. Despite reporting slightly weaker revenues in the first quarter of 2021, CNI is expecting strong growth for the whole year.
CN Rail earned $974 million or $1.37 per diluted share, down from $1.01 billion or $1.42 per share in the preceding year. Adjusted profits were reported to be $872 million or $1.23 per share, compared with $870 million or $1.22 per share in the first quarter of 2020 while revenue for the first quarter of 2021 totaled $3.54 billion. The company reported its recovery from a polar vortex in February with its terminal business up by 19%.
At the end of the fourth quarter of 2020, 31 hedge funds in the database of Insider Monkey held stakes worth $2.18 billion in CNI which is an increase from 26 hedge funds in the preceding quarter holding stakes worth $2.22 billion.
1. Union Pacific Corporation (NYSE: UNP)
Market Cap: $150.538 billion
Number of Hedge Fund Holders: 68
Union Pacific Corporation (NYSE: UNP) offers transportation services by railroad for agricultural products, coal and renewables, animal feeders, petroleum, industrial chemicals, metals and ores etc. As of 2020, its rail network included 32,313 route miles connecting Pacific Coast and Gulf Coast ports with the Midwest and eastern regions of the United States. The company was founded in 1862 and is headquartered in Omaha, Nebraska. The recent financial performance of Union Pacific Corporation despite the COVID-19 pandemic has been strong making it one of the 10 best railroad stocks to buy in 2021. The company’s CFO Jennifer Hamann is optimistic about UNP’s rail lines demand which is currently averaging around 157,000 7-day carloadings which has crossed the 160,000+ threshold in April. The company also announced the opening of a new intermodal terminal in Southern California which is an important import distribution region. Union Pacific Corporation reported a net income of $1.3 billion or $2.00 per diluted share in the first quarter of 2021 as compared to $1.5 billion or $2.15 per diluted share in 2020.
Vltava Fund, in their Q1 2021 investor letter, mentioned Union Pacific Corporation (NYSE: UNP). Here is what Vltava Fund has to say about Union Pacific Corporation in its letter:
“There was a slight change in Vltava Fund’s portfolio in the first quarter. We sold shares of Union Pacific. It was one of three stocks we bought a year ago at the market bottom. Although from a P/E viewpoint this was one of our most expensive purchases ever, the shares worked out quite well, and, when they were more than 90% higher at the beginning of this year, we decided to take profit and put the money into stocks with more attractive valuations.”
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This article is originally published at Insider Monkey.
