3 Rail Stocks to Ride for the Long Term

Think of a booming industry, an industry with potential to reach all-time highs this year; an industry hiring aggressively to keep up with demand; an industry, in short, on the up-and-up. Yes, that's right, I'm talking about the rail and freight business. Let's take a look at why this is so, and what you can do to profit from it.

A strengthening industry
The Association of American Railroads reports that 2012 could very well be the highest-volume year ever for U.S. freight, and lauds the "remarkable" rail recovery since the lows of 2009. It makes sense; when rail is compared head-to-head with trucking, it comes out less expensive for longer distances. Couple that with a fuel efficiency per ton shipped around four times that of trucking, and it's no wonder rail is on the rebound!

CSX (NYSE: CSX  ) is one company well-positioned for the rail recovery. With a $23 billion market cap, CSX is one of the largest players in the game. The company's freight-hauling assets combined with the difficulty of securing rights-of-way approval from the government creates exceptionally high barriers to entry. CSX offers a 2.5% dividend yield and trades at a P/E ratio under 13, in a booming industry where competition can't just materialize spontaneously. The average industry P/E is over 18, making CSX extremely cheap by comparison. This company can be a strong addition to the prudent investor's portfolio.

Vertical integration nation
A slightly more indirect way to invest in the future of freight shipping is to take a look at some companies that manufacture the actual equipment and cars that companies like CSX use. There are a couple worthy players in this space. The $1.8 billion company Trinity Industries (NYSE: TRN  ) could be one nice value play for your portfolio. Its earnings rose more than 100% in 2011, and it pays a 2% dividend. Not only does it sell railcars, it also leases and repairs them. I love this business model because it's a reliable way to generate continuous future cash flows, even if the rail industry were to take a hit. Trinity is currently trading at less than book value -- and a 10.5 P/E -- so I think it could be a wise complement to a well-diversified portfolio as well.

Though it's smaller than the other two companies we've considered -- its market cap is $400 million --  Greenbriar Cos. (NYSE: GBX  ) is another way to play the freight comeback story. It, too, designs and manufactures railcars, as well as provides maintenance. Additionally, the company runs railcar accounting services like billing and revenue collection, allowing its customers to streamline their services. It also trades at the lowest multiple (with a P/E below eight) of any business yet considered, and it has high insider ownership. This suggests a potential value play, with the bonus that management's interests are well aligned with shareholders'. These metrics are good omens for the individual investor!

If you believe in the continued resurgence of rail, then CSX, Trinity, and Greenbriar are worth a good look. Whether it's good dividends, an improving sector, or enticing valuations, we've seen that these stocks may be good places to let your money ride.

Although oil prices have taken a hit recently, the incredible demand for freight shipping could signal that oil is near a bottom. A steady positive trend in commercial activity coupled with a booming population facing enormous transportation issues may force energy prices dramatically higher. Take a look at the Fool's free report, "3 Stocks for $100 Oil," and position yourself to profit from higher energy prices today.

Fool contributor John Divine owns none of the stocks mentioned in the story above. He is a fan of the song "I've Been Working on the Railroad." You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine.

The Motley Fool has a disclosure policy. We Fools may not 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.

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  • Report this Comment On July 17, 2012, at 4:00 PM, DAG1996MF wrote:

    Thanks for the good article. TRN is one of my favorite companies to buy on the cheap when the economy is bottoming because its not only a shielded play on rail transport, but its also a great play on several other areas I like for the long haul -- construction, wind towers and sea transport (the barges to transport the rail cars, wind towers, etc.). As the economy gradually gets on more stable footing, TRN is off to the moon.

  • Report this Comment On July 19, 2012, at 11:50 AM, TMFDivine wrote:

    Thanks for the feedback, djohn! I of course must agree with you, as well as compliment your superb taste in investments.

    Much appreciated.

  • Report this Comment On July 20, 2012, at 12:03 PM, DAG1996MF wrote:

    You're quite welcome, John. And, thank you for the kind words. Like my father use to say... the more you agree with me, the smarter you sound. lol

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