The rail industry is a dynamically competitive landscape. Today, profitable opportunities abound in freight container shipping, also known as intermodal, and the transportation of coal. How rail companies seize these prospects will determine who chugs ahead of the competition and who is left in the dust.
The major players
Five rail companies dominate North America. All operate in intermodal and coal transport, but each railroad holds its own niche of the market.
% Revenue From Intermodal
% Revenue From Coal Transport
Expected 5 Year Annual Growth Rate
|Canadian National Railway (NYSE: CNI )||20%||7%||10.90%||Only North American rail company to cover continent north-south, east-west.|
|Canadian Pacific Rail (NYSE: CP )||26%||11%||11.66%||Roughly 44% of revenue comes from bulk commodities (coal, grains, and fertilizers).|
|CSX (NYSE: CSX )||12%||32%||14.29%||Operates east of the Mississippi; Strong export coal business to Southeast Asia, India, and Germany.|
|Union Pacific (NYSE: UNP )||20%||22%||16.32%||Operates west of the Mississippi River; primarily in western coal; import-export at U.S. West Coast ports.|
|Norfolk Southern (NYSE: NSC )||19%||31%||15.29%||Coal business considered a strength; export coal business from U.S. East Coast ports.|
Sources: Yahoo! Finance, companies' 2011 annual reports.
Railroad companies overall are expected to grow around 15% annually over the next five years. Both Union Pacific and Norfolk Southern are poised to outpace the industry average.
Intermodal transport involves moving freight in a container using rail, ship, and truck without any actual handling of the freight itself in the process. International freight is a huge portion of the intermodal business. Business is favored from western U.S. ports since it takes nearly two weeks longer to receive shipments from eastern than western ports. Union Pacific stands to benefit most because of its dominance in the western United States.
The coal reality
Coal is cheap and plentiful, and it's used to generate electricity in the United States. But since natural gas prices have declined, coal is getting increasingly kicked to the curb. As preference for domestic coal is declining, export coal demand is on the rise.
Nearly half of all coal mined here comes from Wyoming and Montana, and western coal is more desired than eastern U.S. coal because it burns cleaner and produces fewer emissions. With increasing emissions regulations, Union Pacific is in a good position because of its extensive rail network in the western half of the country. The company also recently posted an all-time low fourth-quarter operating ratio.
From 2005 to 2011, total export coal tonnage grew nearly 60%. Coal is a major component of steel production, and as infrastructure flourishes in Southeast Asia, so does the demand for export coal. India and Germany are ramping up their use of coal for utility generation.
Look for Norfolk Southern, CSX, and Union Pacific to benefit most from the trend in export coal -- this is a major strength of these companies. CSX's yields are among the best in the industry. In the past decade, CSX's carload yield (revenue per carload of freight) grew more than 5% per year.
To take advantage of the already strong and increasing demand for export coal, CSX, Union Pacific, and Norfolk Southern are great stock ideas and aren't likely to derail your portfolio.
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