All Aboard: Railroad Stocks on a Roll

This could be the best thing to happen to the railroad industry since Warren Buffet. Last year, when Buffet’s Berkshire Hathaway bought Burlington Northern Santa Fe (BNSF) for $34 billion, the investment community took notice.

This week, another news item has investors eyeing railroads once again. Three Democratic senators, led by Sen. Frank Lautenberg (D. NJ), have co-sponsored a bill called the Focusing Resources, Economic Investment and Guidance to Help Transportation Act of 2010 or, more simply, the FREIGHT Act (S.3529). “If you want to help U.S. business succeed and create new jobs, we need a freight transportation system that works better and can grow with the changing needs of the global economy,” said Sen. Lautenberg in a statement. Can government funding be far behind?

There have been a flurry of news reports lately on the swelling prospects of railroad companies. The Wall Street Journal weighed in (http://blogs.wsj.com/marketbeat/2010/07/13/csx-earnings-the-view-on-the-stuff-moving-business/?mod=yahoo_hs) after a “rosy” second quarter results report from railroad industry giant Jacksonville, FL-based CSX Corporation (NYSE: CSX, http://www.csx.com), a national hauler of freight and passengers. The Economist lauded America’s freight railway system as “the world’s best” (http://www.economist.com/node/16636101) but warned that new proposals for high-speed passenger railways could endanger the system. As for the new FREIGHT Act, Progressiverailroading.com did a nice job of covering the the possibilities the legislation offers the railroads (http://www.progressiverailroading.com/news/article.asp?id=23896) , suggesting the Act “seeks to ‘transform’ U.S. transportation.”

Many of the large cap railroad companies have already been on a roll, thanks largely to increasing freight volumes and cost control measures, particularly Omaha, NE-based Union Pacific (NYSE: UNP, http://www.up.com). Longbow Research Analyst Lee Klaskow noted that UNP has “transformed itself from an industry laggard to an industry leader.” Its stock price was transformative as well, resting at $69.12 as recently as July 21 but closing after hours July 26 at $75.76.

There are even a few small cap stocks to play in this sector. Worcester, MA-based Providence and Worcester Railroad Co. (Nasdaq: PWX, http://www.pwrr.com), an interstate freight carrier operating in New York, Rhode Island, Massachusetts and Connecticut, is tiny by railroad standards, just over $58 million in market cap. And it trades by appointment, averaging only 1,350 in volume per day. A bit larger ($1.7 billion market cap) is Greenwich, CT-based Genesee & Wyoming Inc. (NYSE: GWR, http://www.gwrr.com), which owns and operates short line and regional freight railroads in the U.S., Australia, Canada and the Netherlands. It’s stock has been thriving and jumped up $2.47 to $41.26 on July 26, nearly all the way up to its 52-week high of $41.62 reached last April.

A small, pre-revenue passenger train, Las Vegas-based Las Vegas Railway Express * (OTC:BB: XTRN.OB, http://www.xtrainvegas.com) has created the XTrain which, once it’s rolling, aims to make the five-hour trip through the desert from LA to Las Vegas a whole lot more fun and more friendly to the environment. It’s early for investors, which is why the stock is still very cheap (25 cents). But one word in a statement from American Association of Railroads President and CEO Edward Hamberger might be a good omen. Commenting on the FREIGHT Act Hamberger said: “This bill recognizes the importance of rail…as the safest, most fuel efficient and highly cost-effective way to move both people and goods.” (The italics are mine) Perhaps passenger trains, as well as the freights, may be beneficiaries of the bill.

* Denotes Allen & Caron client

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