Why Railroads Look Attractive Despite Current Valuationhttp://www.fool.com/investing/general/2014/02/04/why-railroads-look-attractive-despite-current-valu.aspx Varun Chandan, Arora
February 4, 2014
Union Pacific (NYSE: UNP) shares rose sharply last Thursday after the railroad company reported solid fourth-quarter results. A day before, another railroad company, Norfolk Southern (NYSE: NSC), saw a sharp rise in its shares after posting better than expected fourth-quarter earnings. CSX Corporation (NYSE: CSX), meanwhile, tumbled two weeks ago after investors were disappointed with the company's results for the fourth quarter. Still, all three railroad stocks were among the best performers in the S&P 500 in 2013. Last year's rally has meant that railroad stocks are now trading at a premium to their 10-year average. Is the premium justified, though, given the declining coal volumes?
Railroad companies report Q4 results
Norfolk Southern also reported its quarterly results earlier in the week, posting record net income of $513 million, or $1.64 per share. This was up 24% on a year-over-year basis. Like Union Pacific, Norfolk Southern also saw an increase in its overall volume even as coal volumes declined. Norfolk Southern's overall volume rose 4%, driven by growth in merchandise and intermodal traffic.
CSX also registered a drop in coal volumes but managed to post a 6% increase in total volume, helped by growth in the merchandise and intermodal markets. Unlike Union Pacific and Norfolk Southern, however, CSX shares tumbled as the company's profit missed estimates and the company's operating ratio rose 140 basis points to 73.2%. This compares to Union Pacific's operating ratio of 65% and Norfolk's operating ratio of 69.4%. For 2013, CSX had operating ratio of 71.1%, compared to 70.6% reported in 2012. Union Pacific's operating ratio for 2013 improved 1.7 percentage points to 66.7%, while Norfolk Southern's operating ratio for 2013 improved one percentage point to 71%.
Railroads attractive despite declining coal volume
Are the valuations justified?