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RailAmerica Picks Up Steam

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This article is part of our Rising Star Portfolios series.

Though investing is no place for jingoistic patriotism, I bought RailAmerica (NYSE: RA  ) in my Rising Stars portfolio for a very American reason. Railroads, the steel veins of our nation's infrastructure, print cash -- and RailAmerica's no exception.

When I first bought the stock, its superficially ugly income statement, lingering and still-large debts from Fortress's (NYSE: FIG  ) 2007 leveraged buyout, and legacy of mismanagement masked RailAmerica's tremendous cash-generating promise. Given its potential to deliver operational improvements -- RailAmerica's operating metrics still lag its peers -- and regional monopoly status, RailAmerica looked like a classic, obscured value. A quarter later, the market seems to agree. Shares moved 10% higher following the company's fourth-quarter earnings release.

Train kept a-rollin'
A glance at any railroad's numbers -- Union Pacific (NYSE: UNP  ) , CSX (NYSE: CSX  ) , Genesee & Wyoming (NYSE: GWR  ) , or Canadian National (NYSE: CNI  ) -- reveals the happy trend of consistent above-inflation price increases. True to form, RailAmerica passed a 4% price increase this quarter, and adjusted carload volumes increased 4.4%.

The company delivered volume increases across product categories, as U.S. consumers' and companies' confidence returned from previous years' near-apocalyptic lows. Chemicals and metallic ores and metals showed particular strength. Alongside an acquisition-boosted 34% increase to non-freight revenue  -- things like car storage, leasing real estate, and repairs -- that renewed robustness drove 17% growth in quarterly revenue.

To top it all off, the company delivered a 79.9% adjusted operating ratio (operating costs as a percentage of total revenue), as higher volumes and operational efficiencies wrung improvements from the year-ago figure of 82.6%. That greater efficiency led to a 35% increase in RailAmerica's adjusted operating profits.

Next stop?
With $153 million in cash on hand, management's not sitting idle. The company announced a $50 million repurchase authorization, which should pay off for shareholders given today's low share price. In the coming year, I'd also expect the company to consistently deploy excess cash flow toward debt reduction. With debt-bearing interest at 9%, and the debt burden still sizeable, that's a very good use of cash. Coupled with the company's operational efficiency mandates, which include centralizing backoffice tasks and automating payroll, this effort should push cash flow higher in years to come.

Add it up, and despite the market's fervor, RailAmerica shares still look like a very attractive value. With apologies to Gladys Knight and the Pips, RailAmerica's not a one-way train to Georgia, but a worthy vehicle for the long haul.

Canadian National Railway is a Motley Fool Stock Advisor choice. Genesee & Wyoming is a Motley Fool Hidden Gems selection. The Fool owns shares of RailAmerica. Try any of our Foolish newsletter services free for 30 days.

Michael Olsen does not own shares of RailAmerica. He does, however, always sing the "whoo-whoo" part of "Midnight Train to Georgia," complete with railroad whistle gestures. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On February 28, 2011, at 7:16 PM, owenlhjphillips wrote:

    I picked up RA when your originally recommended it and as you've said it's done quite well. Realistically, as a short line, how much can this company grow? I know efficient, well run short lines are often picked up by Class I rail roads. Is this something that would be possible in the distant future? I know you don't have all the answers, just curious to what your take is on the long term future of this company.

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