Jubak's Journal Recent articles: • At AIG, the real mess is far from over, 4/12/2005 • 10 stock picks for the new era, 4/8/2005 • A golden way to play the dollar's fall, 4/6/2005 More... | Jubak's Journal 5 railroad stocks rolling along Economic growth means companies need to ship more and many are turning to railroads. Railroads also benefit from rising energy costs. By Jim Jubak While the stock market looks for direction, railroad stocks just keep chugging along. And why not? The sector's fortunes are closely tied to U.S. economic growth, still a robust 3.8% at last count. Railroads get a big bang for the buck since they carry exports and imports. So news that the U.S. trade deficit hit $61 billion in February, as imports climbed to $162 billion and exports stayed steady at $101 billion, was actually good news for railroads. Just about all industries, except autos, that make the bulky stuff that railroads ship best are projected to ship higher volumes this year than last. And the railroad industry is one of the few non-energy industries that benefit from rising energy prices. Sure, higher fuel costs bump up operating costs, but growing revenue from shipping coal, the cheapest domestic fuel now, more than makes up the difference.
In my regular 11:20 a.m. ET Wednesday appearance on CNBC's "Morning Call" I picked three railroad stocks for the next six months. When bad is good After anemic earnings growth of 5.7% annually on average over the last five years, Wall Street is projecting a pickup to 9.8% growth over the next five years. The stock's high trailing price-to-earnings ratio of 27.8 anticipates a pickup in earnings growth to 24% in 2005 and 16% in 2006. On projected 2005 earnings the P/E ratio is a more modest 16.1. Our StockScouter rated the stock a 9 out of a possible 10 on April 13. Shipping coal In a sign of railroads' pricing power in the current market, in the Fording Coal Trust deal Canadian Pacific was able to add a fuel-cost surcharge for the last two years of the contract that'll let the railroad pass along part of any increase in energy costs. Wall Street expects the company to grow earnings per share by 11% annually on average over the next five years. The stock trades at a trailing 12-month P/E ratio of 16.1. Our StockScouter rated the stock an 8 on April 13. Gaining market share Norfolk Southern is already one of the industry's largest shippers of coal (coal accounted for 23% of the company's revenue in 2003), and the company looks set to pick up market share in that sector this year. Along with more volume, Norfolk Southern's superior speed to market should result in more pricing power for the railroad. The Wall Street consensus calls for almost 12% earnings growth annually on average over the next five years. That's a drop from growth in the last five-year period but still solid for a stock trading at just 15.3 times trailing 12-month earnings per share and works out to a PEG (price-to-earnings-to-growth rate) ratio of just 1.3. Our StockScouter rated the stock a 9 on April 13. I always give CNBC.com on MSN readers two exclusive picks that I didn't mention on air. Exclusive picks If you look at the company's cash flow, you'll see the source of that confidence. Analysts project that the company will generate about $1.4 billion of free cash flow this year. Much of that will find its way into dividends since railroad companies have only limited opportunities to reinvest their capital in new opportunities. Limited, yes, but Canadian National did acquire about 1,800 miles of track in its 2004 acquisitions of Great Lakes Transport and BC Rail that'll contribute a full year of revenue in 2005. Wall Street analysts project average annual earnings growth of 11.3% over the next five years. The shares trade at a trailing 12-month P/E ratio of 16.6. Our StockScouter rated the stock a 9 on April 13. Wall Street expects earnings per share to leap by almost 23% this year, which explains the 12-month trailing P/E ratio of 25.1. The P/E ratio based on projected 2005 earnings per share is just 15. Wall Street projects average annual earnings growth of almost 11% for the next five years. Our StockScouter rated the stock a 6 on April 13. (Burlington Northern was a Jubak's Picks in my portfolio Jan. 11.) Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
|
|||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.