Why invest in U.S. railroads? They operate in a seller’s market and enjoy strong pricing power, for one. Two, they have geographically strong moats, operating in a capital-intensive industry with high barriers of entry. And lastly, they are well positioned to benefit from the North American oil and gas boom.
Even though it can be up to five times as expensive to transport crude by train, a lack of pipeline infrastructure often makes rail the only game in town. Intermodal transportation by rail, which is estimated to account for 20% of railroads’ revenue currently, is also gaining popularity amongst shippers. Rail is more cost effective, especially since rail can be up to 300% more fuel efficient than trucks, according to Zacks Equity Research.
And just to throw in one more reason why rail is a worthy investment, the demand for rail-freight transportation will increase approximately 88% by 2035, according to the Department of Transportation.
Above are four of the largest publicly traded pure-railroad companies in the United States– Union Pacific Corporation (NYSE:UNP) in dark blue, CSX Corporation (NYSE:CSX) in purple, Norfolk Southern Corp. (NYSE:NSC) in light blue, and Kansas City Southern (NYSE:KSU) in gold.
Burgandy and green are Canadian rail companies, and yellow illustrates rail operated by BNSF Railway, which is owned by Berkshire Hathaway Inc. (NYSE:BRK.A).
Union Pacific Corporation (NYSE:UNP) is the largest railroad in the United States, both by market cap and by sales. Union Pacific operates primarily in the Western U.S., and is ideally placed to benefit from increasing oil production from the Bakken Shale formation in Montana and North Dakota. The company encompasses 23 states in the western two-thirds of the country by rail, and has a diversified business dealing in the transportation of agricultural products, automotive, chemicals, coal, industrial products and intermodal.
Union Pacific Corporation (NYSE:UNP) recently announced that it will also be strengthening infrastructure in Missouri and Illinois, investing more than $20 million in rail lines, without the help of taxpayer dollars. The new project will be one of 1,500 planned this year by the company.
Union pacific currently operates a 32,000-mile network of rail. It is encouraging to see Union Pacific invest in its infrastructure, as it is imperative for its future profitability and ability to meet capacity. This is especially true for Union Pacific Corporation (NYSE:UNP), whose rails cover almost 66% of the nation.
According to the Department of Transportation, close to 90% of the nation’s railway capacity needs to be upgraded to meet the boom in rail transportation demand expected by 2035.
While the U.S. railway industry only comprised a little under 50% of America’s total freight business, railroad companies that aggressively expand their infrastructure will be able to grab larger slices of the freight pie going forward if they can meet capacity– and therefore facilitate and accommodate the increasing demand.
The largest Eastern player is CSX Corporation (NYSE:CSX), followed by Norfolk Southern Corp. (NYSE:NSC). CSX is looking to invest more than $2 billion into its rail infrastructure this year, and the company is also a major stakeholder in the National Gateway. The National Gateway is an $850 million public-private partnership infrastructure initiative intended to allow a more efficient freight transportation connection between ports in the Mid-Atlantic and the Midwest.