Rail sector gets back on track

Profits pick up steam; stock values may follow

Railroad stocks, the pariahs of Wall Street in the past few decades, are back on track - even looking prosperous.

Stock prices are climbing, valuation levels remain relatively low, and shipping orders power along at high speed.

Industry profits grew just under 9 percent, to $5.7 billion last year, according to Richard Stice, a transportation analyst for Standard & Poor's Corp.

He expects a rise of 5.5 percent this year. "We're seeing market share going from trucking firms back to railroads," he says, as industrial shippers "look for lowest-cost" delivery systems.

While few analysts suggest that investors race out and buy rail stocks in bulk - in fact, all four main US carriers are rated "hold" by consensus stock forecasts - the crucial point is that railroads are once again being viewed as potential money earners, not just dinosaurs of the industrial age.

Among the three major US transportation sectors tracked by S&P, the railroad industry has thundered well out front, according to Mr. Stice.

Through June 1, the S&P railroad industry index is up 22 percent. The S&P airline index, in contrast, is down 9 percent through June 1; the S&P trucking index is up a modest 5 percent through the same period.

"The railroad industry is looking very good at present," in part fired up by a surge in shipments of coal, mainly to electricity plants, Stice says.

The industry, perhaps the oldest existing industrial group in the US, going back to the 1820s and 1830s, is a shadow of it former grand self, but also more commercially vibrant than at any time since enactment of the Staggers Act in 1980, which essentially deregulated the industry.

Nostalgia keeps interest high. While railroads have lost substantial market share to airlines and truckers, railroading continues to occupy a special niche in the hearts of the public.

Still, only five major independent rail carriers are left in the US: Union Pacific, Burlington Northern Santa Fe (BNSF), CSX, Norfolk Southern, and Kansas City Southern, which until recently also owned two mutual-fund groups, Berger and Janus funds.

Canada also has two large carriers: Canadian National (CN), which now owns Illinois Central, a large US system, and Canadian Pacific, which is seeking to acquire Wisconsin Central, a smaller but important US line in the upper Midwest.

All the major North American railroads are now freight carriers. Intercity passenger traffic is the domain of Amtrak in the US. And, of course, there are various commuter services.

While the consensus view from stock analysts - according to information firm Zack's - is to "hold" existing railroad stock, some analysts recommend buying particular carriers.

Jill Evans, a transportation analyst with J.P. Morgan Chase, for example, believes that rail companies have advantages in the current economic climate, because of the demand for coal. She has been recommending Union Pacific, which operates in 23 states, along with CN, and BNSF.

Standard & Poor's has a five-star (best) rating on CN, also because of its large coal business. It has four-star ratings on Canadian Pacific, CSX, and Union Pacific, and a "hold" on Norfolk Southern.

While the industry is currently poised for expansion, some major challenges remain, experts note: The two East Coast carriers, CSX and Norfolk Southern, are still trying to fix shipping delays resulting from their merger and takeover of the Conrail system.

And the two large Western carriers, Union Pacific and BNSF, are still working out snags resulting from their absorption of several competing rail lines in the 1990s.

Shippers, and a number of congressional lawmakers, fret about the likelihood of additional consolidations, including a merger between CN and BNSF, now delayed, that would create North America's largest rail system.

Investors can seek out rail stocks through brokerage houses or, for mutual funds, by running a search of both the Morningstar and Value Line websites. Beyond the big players, small rail companies include Florida East Coast Industries, Genesee & Wyoming Inc., RailAmerica (the largest network of small railroads in the US), and Transportacion Maritima Mexicana, which operates in Mexico.

(c) Copyright 2001. The Christian Science Monitor