Riding the Rails - Hilton Head Monthly, December 2009


A model train chugging merrily around the Christmas tree, with a pint sized conductor in pajamas and railroad cap, is as recognizable an icon of the holiday season as stockings on the mantle.  Retro or not, model trains are still alive and well, still the province of small boys and middle aged men, and still a perennial best seller at Christmas time.  Unfortunately, the companies that make model railroads aren’t publicly traded or available for investment. The best known of these, Lionel Trains, Marklin, and LGB, have been around for decades, and their offerings are broad enough in variety and cost to not disappoint any parent who feels this year’s Christmas tree wouldn’t be complete without locomotives, track and transformer. 

On the other hand, you can ride the rails with the big boys. Recently investor interest was refocused on the railroad transportation industry, when Warren Buffett announced that his firm Berkshire Hathaway would pay $100 per share in cash and stock for the 78% of Burlington Northern Railroad (BNSG) it didn’t already own. The price, $34 billion, was a 31.5 % premium to the current market price at that time, and widely seen as a bet on the long term recovery of the American economy. Burlington Northern is the nation’s second largest railroad, and the largest in terms of hauling foodstuffs and coal.

Although they haven’t been particularly rewarding thus far in 2009, investors are now watching the three other mega-railroads that haul the balance of the nation’s freight, CSX Corp (CSX), Norfolk Southern Corp (NSC) and Union Pacific (UNP).  UNP was founded in Omaha in 1862, and runs 32,000 miles of track system, primarily in the western United States. The company has a market cap of over $31 billion, and has earned a return on assets of 5.43% and a return on equity of 12.49% over the trailing 12 months. It’s currently trading at $62, 15.7 times its trailing earnings per share of $3.97. UNP pays a quarterly dividend of $1.08, giving it a yield of 1.7%

CSX operates a 21,000 route mile rail network, primarily in 23 states east of the Mississippi River, as well as the Canadian provinces of Ontario and Quebec. Based in Jacksonville, Florida, CSX has a market cap of $18.7 billion; its return on shareholders equity has been 12.32%, and is currently selling at $47.69 per share, roughly 17 times per share earnings of $2.77, with a yield of 1.8%

Norfolk Southern, based in Virginia, also runs its freight in the eastern US, over 21,000 miles of rail lines. NSC has a market cap of $19.16 billion, and 367 million shares outstanding.
It is currently selling at price is $52.07, 16.5 times its per share earnings of $3.16. NSC has a $1.36 dividend, a yield of 2%.  Investors holding these stocks over this past twelve months have seen mixed results, with Union Pacific just about even, Norfolk Southern off 5.5%, and CSX with a gain of 11.8%.


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