Norfolk Southern Corp. (NSC), Canadian Pacific Railway Limited (USA) (CP), Canadian National Railway (USA) (CNI): 3 Railroads That Could Continue To Outperform

As natural gas continues to replace coal, many North American railroads have begun struggling to retain their growth momentum. Even the upcoming coal gasification plants in the continent won’t be operational until 2018, which suggests that the domestic coal demand could continue to decline. However, intermodal transportation is picking up rapidly, and North American railroads with mature intermodal routes are coming out unscathed.

Company #1

Norfolk Southern Corp. (NYSE:NSC) currently operates 22,00 route miles in 22 states, and has the most extensive intermodal transportation network in the eastern states. But the company isn’t stopping here.

To expand its intermodal transportation, Norfolk Southern Corp. (NYSE:NSC) announced the launch of its new intermodal terminal at Dakota earlier this year. The company also launched its Thoroughbred Bulk Transfer terminal in Knoxville last month. Apart from these new terminals, the company is also adding new service lanes, which should altogether boost its intermodal transportation.

As of now, its coal and intermodal revenues account for 23.5% and 21.2% of its overall revenue, respectively. Its balanced revenue mix allows Norfolk Southern Corp. (NYSE:NSC) to enjoy the best of both worlds. In the recent quarter, its revenues from coal shipments plunged by 17%, but a 9% spike in its intermodal revenues allowed the company to beat the Street’s estimates.

As a result of its solid revenue growth, shares of Norfolk Southern Corp. (NYSE:NSC) have risen by 25% over the last year. And analysts at BMO Capital Markets estimate its fair price to be around $91 per share (around 18% premium).

Company #2

Canadian Pacific Railway Limited (USA) (NYSE:CP) wasn’t always the charming one. The company witnessed its rapid growth after William Ackman started to shake things up. It began taking advantage of the declining road transportation and rising rail shipments by strategically expanding its railroads network.

Canadian Pacific also expanded its Vancouver facility last year, which is why its grain volumes rose by 13% during Q1FY13 (YoY) with 10% fewer cars. Also during the quarter, its coal volumes were up by 12%.

Its coal segment still generates most of its revenue, which saw a 9% spike in its quarterly report due to strong international demand for met coal. But its quarterly revenues from intermodal transportation declined by 4%. I don’t think that’s a cause of concern, because intermodal transportation currently generates around 25% of its total revenues, which is 200bps – 300bps higher than most of its peers.