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3 Railroad Stocks with Plenty of Steam to Go Higher This Year

Zacks Equity Research

by Thomas Young

Rail stocks have generally had a great year so far. Of the most promising rail companies for the remainder of 2014, here’s an analysis of three – Union Pacific, Kansas City Southern, and GATX.

Overall, for holders of Union Pacific (UNP) and GATX (GMT), it’s been a great year, with both stocks’ returns in the upper echelon of returns. The first five months of 2014 has not been as kind to Kansas City Southern (KSU).
With rail stocks already up significantly in 2014, why would they be poised for strength?
Here are five reasons why these three rail stocks are poised for strength before their earnings announcements during the week of July 14.
First, freight and rail traffic is nowhere near peaking points.
After a strong recovery in 2010, grow in rail and freight traffic decelerated somewhat, as is the case with most economic indicators subject to the business cycle.
Recent indications are that the rail traffic is set to re-accelerate this summer, as consumers diversify their travel experience and businesses look for less costly transportation options.

Second, there’s a real shift among businesses towards the use of rail. Buffett must have been on to something when he bought Burlington Northern Santa Fe in 2010, earning a profit of 30% every year under Berkshire ownership.
Third, Union Pacific, Kansas City Southern, and GATX are all expanding operations significantly, a signal of growing demand for rail services. Union Pacific recently celebrated its newest facility, a 2,200-acre site just west of the Santa Teresa Airport, including crew change buildings, a fueling station, and an intermodal ramp. The facility is connected with Union Pacific’s critical Sunset Route, a rail line of 760 miles connecting El Paso, Texas to Los Angeles, California.
Union Pacific’s $400 million Santa Teresa site is only a portion of a planned $4.1 billion investment in 2014, a component of UP’s long-term strategy of expanding service along its 32,000 mile network.
Here’s a look at Union Pacific’s net fixed assets over the past few years.

See the full Union Pacific balance sheet
Fourth, UP, KCS, and GATX are strategically connected with the Western United States, the fastest growing geographic sector within the United States.
Fifth, all three have generally surprised on the upside recently, something that will likely be a trend this summer as analysts slowly to catch up. The recent Q1 earnings surprise for GATX was about 20%. In each of the past five quarters, Union Pacific has surprised on the upside. Kansas City Southern’s recent surprise came in at 7%, the largest in the past five quarters.

GATX Corporation - Earnings Surprise | FindTheBest


Union Pacific Corporation - Earnings Surprise | FindTheBest


Kansas City Southern - Earnings Surprise | FindTheBest


Overall, Union Pacific, Kansas City Southern, and GATX appear poised for strength this summer as the economy freight and passenger traffic re-accelerates. In addition to stronger demand from freight and passenger traffic, the railroads look as though they will continue to benefit from the long-term shift towards the use of rail. Rail companies are also signaling their belief in their long-term outlook, with continued strong investment in infrastructure.

Lastly, these rail companies may also benefit from stronger growth in the Western United States, as evidenced by their ability to outperform analysts’ earnings estimates on a fairly regular basis.

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