With the market abuzz daily on the latest technological innovation, railroads, by comparison, seem so 19th century. But the sector is again taking center stage as the economy heats up.
According to Bloomberg News, railroads can't keep up with demand for their services. Shipments increased 6% in the first half of 2004, and full-year volumes are projected to outpace last year's record levels. Meanwhile, the volume of goods arriving at West Coast ports is expected to accelerate as the peak fall shopping season approaches. Market conditions seem ripe for railroad rate hikes, and, indeed, at least two freight carriers have implemented such increases.
Both Union Pacific
Burlington Northern, on the other hand, appears to have better managed market conditions. The company began to hire more aggressively at the end of last year and accelerated recruitment at the beginning of 2004. In addition, the firm plans to bring 414 new locomotives online this year. Although this extra spending certainly eats away at earnings, Burlington Northern foresees earnings growth of 15% to 20% for the second quarter and full year.
Both Union Pacific and Burlington Northern are seeing unprecedented demand for their services and congestion on their networks. But of the two, Burlington Northern seems worthy of a premium. Trading at under 16 times trailing earnings, its stock may be worth a closer look.
Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.