After 34 weeks of declining volumes, railroads could be turning around - which is impressive considering how hard it is do a 180 in a train.
An Associated Press article on Friday cited two straight weeks of gains within the sector, also citing positive notes by Bear Stearns analyst Edward Wolfe. Part of the increased capacity can be attributed to the falling U.S. dollar, which is upping export demand for agricultural and metal products. (To read the full article, see "Sector Snap: Railroads Rise".)
At least the falling greenback is good for something, right? One very important point to consider here is that locomotives generally use less diesel fuel than trucking, something that absolutely needs to be considered, given that oil is now trading near $100 a barrel.
The Cost Comparison
Rail is more cost efficient than trucking according to a 2004 report prepared by the Office of the Secretary of Transportation of the United States Department of Transportation. The report, based on a case study in Baltimore, Maryland, found rail shipping resulted in a cost savings of 3.5-cent per affected ton mile in 2004, growing to 5.5 cents in 2020.
At the end of the day, rail should most likely be the preferred shipping method of those wishing to move bulk goods over long distances. Rail isn't perfect for every situation, of course, (trains don’t have the luxury of point-to-point delivery, and labor costs for a lot of loading and unloading can quickly erode the cost savings of shipping via rail). However, for goods that move directly from producer to a seaport, rail can be a massive cost advantage, hence the rise in volumes of rail-moved exportable goods.
Really what this comes down to is the falling greenback is beneficial for rail volumes as the United States sees increased exports in agricultural products and metals.
Trains are Nice, but how do we Make Money?
Three major candidates to consider are Union Pacific (NYSE:UNP), Burlington Northern (NYSE:BNI) and CSX Corp (NYSE:CSX). Within the parameters of my usual rhetoric, it's important to note that these stocks are not without risk, as all three are up about 75 to 100% since 2005. Obviously chasing a stock isn't a preferred method of investing. However, all three still look fundamentally healthy despite gains over the past two years.
Moreover, with railroads being fairly stable, these three business had quarterly revenue growth in the 3.3% to 5.4% area. What we're talking about here are cash-healthy companies that live by the motto: slow and steady. Railroad shipping is a tried and true business, one in which the owners have had plenty of time to work out all the kinks. Case in point, operating margins for all three are above 20%. Finally, all three have dividend yields between 1.4% and 1.5%, just a little more gravy for income investors.
Bottom Line
With the declining dollar stimulating agricultural and metal exports and a significant cost argument compared to trucking, railroads could be great investments for long-term holders in the years to come.
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