Two rail stocks
In the rail space, it’s important to understand that most coal production is east of the Mississippi. To play the coal rebound, you want to be in rail stocks that have good exposure to the coal producing regions.
CSX Corporation (NYSE:CSX) transports coal to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities. The company operates approximately 21,000 route mile rail network covering 23 states east of the Mississippi River. The company operates over 4,000 locomotives.
The other rail stock on the east coast is Norfolk Southern Corp. (NYSE:NSC). Norfolk Southern Corp. (NYSE:NSC) transports coal to utilities, industrial plants, export facilities, and to steel manufacturers. The company operates approximately 20,000 miles of rail over 22 states and the District of Columbia.
Outlook for these two rail stocks
The lack of coal demand has been a problem for the rail industry. An estimated 40% of all railroad tonnage is coal. Low natural gas prices not only hurt the coal stocks, but the rail industry as well as less coal was shipped. Both CSX Corporation (NYSE:CSX) and Norfolk Southern have traded at lower multiples than the biggest railroad, Union Pacific Corporation (NYSE:UNP), because they are more exposed to the coal cycle. As the commodity cycle is turning for coal, look for both stocks to catch up to Union Pacific Corporation (NYSE:UNP) in terms of multiples. CSX Corporation (NYSE:CSX) and Norfolk Southern both have P/Es just above 14, whereas Union Pacific trades at a P/E of over 18. Look for CSX Corporation (NYSE:CSX) and Norfolk Southern stock to rise and trade closer to Union Pacific’s 18 P/E.
I see the coal cycle as having bottomed out and the tide is now turning for these coal and rail stocks. All four are great ways for investors to play this rebound and capture profits.
The article Play the Coal Rebound With These Stocks originally appeared on Fool.com and is written by Mark Yagalla.
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