3 Companies That Won't Derail Your Portfolio

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.

Company

% Revenue From Intermodal

% Revenue From Coal Transport

Expected 5 Year Annual Growth Rate

Niche

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 business
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.

All aboard
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.

Many investors are concerned about what trends in energy prices may do to one's portfolio. If you're looking for some great ideas that address these concerns, then look no further than a free report crafted by my Foolish cohorts, "3 Stocks for $100 Oil."

Fool contributor Nicole Seghetti owns shares of Canadian National Railway. Motley Fool newsletter services have recommended buying shares of Canadian National Railway. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1857085, ~/Articles/ArticleHandler.aspx, 10/24/2014 3:36:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement