Railroad companies are capital intense industries with major fluctuations in freight and rates depending on the economy. If you had to invest in this sector, then these three rail companies seem undervalued with P/E<10, consistent earnings and age.
Union Pacific Corporation (UNP), a $105 billion rail company that has been around for over 150 years, earned over $10 billion last year on revenue of $21 billion. That’s an EPS of $13.50. It has $1.3 billion in cash and over $32 billion in total debt. It has been paying a dividend consistently, growing it since the late 1990s. Its current dividend yield is 2.19%. We expect that this whopping debt load can be maintained given that the company has been around forever. Its rail tracks cover the midwest, northwest and south pacific area of the country. Its main competitor is BNSF which is a private company. They have a duopoly in the region which is very nice.
Norfolk Southern Corp. (NSC), a $40 billion rail company that has been around since the 1980s – it was created merging the Southern Railway (circa. 1890) and Norfolk & Western (circa. 1881) – earned over $5 billion for 2017 on revenue of over $10 billion. That’s an EPS of approximately $18.60. Rather impressive. It has a dividend yield of 2.02%. It also has consistently paid and increased its yield since the late 1990s. It has almost $700 million in cash and almost $20 billion in total debt. A substantial amount of liabilities given the size of the company. Its rail tracks cover the northeast and the southern atlantic of the country and competes with CSX in that area.
CSX Corporation (CSX), an approximately $50 billion rail company, has also been around since the 1980s. CSX earned over $5 billion for 2017 on revenue of over $11 billion. That gives an EPS of $6.00. It has a dividend yield of 1.60% and has been paying and growing its yield since the late 1990s. It has over $400 million in cash with $21 billion in total debt. Its capitalization is almost an exact replica of Norfolk Southern Corp. Its rail tracts cover the same area as NSC.
Again, if you had to invest in this industry, one of these companies should be your choice. Our recommendation would be to go with Union Pacific Corporation. Since all three have huge debt loads, which is relevant to the industry, the company you pick should be able to service its debt in all financial environments. UNP would be the best since it yields the most, consistently earns profits and has been around a long time. UNP has seen many financial calamities in its day (1873, 1907, 1929, 1987, 2007), therefore it knows how to “weather the storm”.
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