Burlington Northern on Track

With the market abuzz daily on the latest technological innovation, railroads, by comparison, seem so 19th century. But the sector is again taking center stage as the economy heats up.

According to Bloomberg News, railroads can't keep up with demand for their services. Shipments increased 6% in the first half of 2004, and full-year volumes are projected to outpace last year's record levels. Meanwhile, the volume of goods arriving at West Coast ports is expected to accelerate as the peak fall shopping season approaches. Market conditions seem ripe for railroad rate hikes, and, indeed, at least two freight carriers have implemented such increases.

Both Union Pacific (NYSE: UNP) and Burlington Northern Santa Fe (NYSE: BNI) will raise intermodal rates from the West Coast beginning next month. Union Pacific, though, may have more difficulty celebrating. That railroad has had to spend heavily to hire and train new workers to replace an unexpectedly high number of employees who chose to retire. To relieve pressure on its network, Union Pacific even enlistedUnited Parcel Service (NYSE: UPS) to carry parcels. These developments contributed to higher-than-expected operating costs, prompting the company to announce last month that second-quarter earnings are expected to be between $0.60 to $0.65 per share, below last year's earnings from ongoing operations of $1.05.

Burlington Northern, on the other hand, appears to have better managed market conditions. The company began to hire more aggressively at the end of last year and accelerated recruitment at the beginning of 2004. In addition, the firm plans to bring 414 new locomotives online this year. Although this extra spending certainly eats away at earnings, Burlington Northern foresees earnings growth of 15% to 20% for the second quarter and full year.

Both Union Pacific and Burlington Northern are seeing unprecedented demand for their services and congestion on their networks. But of the two, Burlington Northern seems worthy of a premium. Trading at under 16 times trailing earnings, its stock may be worth a closer look.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.