Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Union Pacific Corporation (UNP), CSX Corporation (CSX), Norfolk Southern Corp. (NSC): Is It a Good Idea to Invest in U.S. Railroads?

A major objective of the initiative is to free up some of the freight bottlenecks in the midwest that tend to cause delays for freight heading west. It plans to do this by building a double-stack cleared corridor for intermodal shipments between the Midwest and mid-Atlantic ports, which should benefit CSX Corporation (NYSE:CSX).

Intermodal is highly lucrative business, and can help offset the company’s dragging coal business. CSX is also optimistic, believing that its businesses (not including coal) can outpace the growth of the sluggish U.S. economy.

Norfolk Southern Corp. (NYSE:NSC) also seems to be optimistic, even with a problematic and challenging coal business, which an executive from the company stated would be a “wild card for the immediate future.” The company realizes that while coal has been a historical staple of the company’s business and may even one day be a staple of its business again in the future, as of now it needs to be offset with another business that is currently more profitable– such as emerging energy markets. These include sand, pipe, and other materials for shale-gas production– and of course crude by rail.

Norfolk Southern Corp. (NYSE:NSC) recently built and opened its Birmingham Regional Intermodal Facility in Alabama, worth around $97.5 million, which was created to allow a more efficient and higher-capacity intermodal freight rail route between the Gulf Coast and the Northeast.

Other opportunities for rail transportation

Besides emerging energy markets, other possibilities for profit are popping up for railroad companies. With auto companies (including both Honda Motor Co Ltd (NYSE:HMC) and Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY)) planning to expand and boost production in Mexico, finished vehicle production in Mexican markets may increase by as much as 35% by 2015, which will provide great opportunities for Kansas City Southern (NYSE:KSU) to capitalize on of the shipping and returning of raw materials to and from Mexico, Canada, and the United States.

Kansas City Southern (NYSE:KSU) is also poised to benefit from oil as well, as its rails connect the Bakken with various refiners on the Gulf of Mexico. This should help it to keep the profits flowing, especially if pipelines are continually delayed.

Valuations

Ok, so how do these companies stack up at their current levels?

P/E Forward P/E Dividend (yield) Market cap (billions)
UNP 18.45 14.42 $2.76 (1.70%) $73.32
CSX 13.86 12.48 $0.60 (2.40%) $25.63
NSC 14.04 12.18 $2.00 (2.60%) $24.57
KSU 29.91 21.83 $0.86 (0.80%) $12.15

While Kansas City Southern (NYSE:KSU) looks overvalued at current levels with not much dividend yield supporting it, the other rail companies look more attractively valued going forward. If Union Pacific Corporation (NYSE:UNP) can grow its earnings and meet forward estimates, its current trailing P/E isn’t as expensive as it looks.

The East Coast rail plays look best currently, but they have also been negatively impacted by coal and may continue to see it drag on their profitability. They also offer the better paying dividends, however.

The bottom line

Investing in America’s railroads should be very profitable going forward. The shale oil and gas boom in the U.S. should continue to give these railroads some steam. Intermodal should also give a boost, as it is cheaper with rail than by truck. This could really pickup if trains become powered by natural gas, which only costs around $0.50 per gallon– as opposed to about $4.00 for diesel.

My favorite picks are CSX Corporation (NYSE:CSX), for its cheap valuations and solid dividend yield, and Union Pacific Corporation (NYSE:UNP), for its proximity to the Bakken and enormous size and scope. Both are great rail plays, and investing in both gives an investor exposure to both coasts.

Joseph Harry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Is It a Good Idea to Invest in U.S. Railroads? originally appeared on Fool.com.

Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.