Can This Railroad Keep Its Momentum?

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Sometimes hailed as a "true American success story," the major railroad carriers have experienced a renaissance in the past decade. It wasn't always that way, though. In fact, it took years for the industry to break free from the shackles of heavy unionization and overregulation.

Last week, however, Union Pacific (NYS: UNP) made it clear that the railroads' business model is thriving. The largest carrier in the U.S. reported a record profit to kick off a week of announcements from each of the major players. Let's take a look at East Coast competitor CSX (NYS: CSX) to see whether it can accomplish a similar feat on Monday.

The top line
Currently, analysts' average prediction for revenue at CSX stands at $2.99 billion for the quarter and $11.78 billion for the year. These figures represent potential top-line growth of 6% on a quarterly comparison and 10.7% on an annual basis.

How do we assign merit to these forecasts? For starters, we can dig a little deeper using the rail volume figures posted weekly by the Association of American Railroads. As of year-end 2011, CSX's total carload volume increased 4.2% on a quarterly basis and 2.1% on a year-over-year basis. Carloads reflect shipments of goods like coal, grain, and other heavy materials. Shipments of intermodal containers, which often contain consumer goods that require greater transport flexibility, increased 3.1% on a quarterly basis and 4.6% on an annual basis. In total, the combined carloads and intermodal containers shipments increased 3% for the year, slightly below UNP's 4% increase. Overall, this steady volume growth should translate to respectable revenue figures due to the railroads' ability to pass along fuel surcharges to customers.

The bottom line
Heading into the earnings announcement, the average analyst estimate calls for profit of $0.44 per share from CSX, an increase of 16% from quarterly earnings a year ago. For the full year, analysts are predicting earnings of $1.68 per share, which would imply year-over-year growth of 24%.

In an age-old industry, such strong earnings growth would seem rare, but these operators are at the top of their game. For starters, solid revenue performance accounts for a portion of the earnings growth. At the end of 2010, CSX's top line grew more than 17%. However, an even more significant driving factor has been the railroads' ability to maintain low costs after emerging from the recent recession. Forced to reduce overhead during the downturn, the railroads reemerged leaner and were able to ramp up volume while adding only minimally to the cost structure. The result has been expanding profit margins and a boost in shareholder returns.

With that in mind, let's take a look at how the railroads have performed for shareholders over the past two-and-a-half years.

It wouldn't be a stretch to say that every operator has left the broader S&P 500 index in the dust. Since emerging from the recession, the average return for the railroads clocked in at 182% versus 47% for the S&P 500.

Foolish takeaway
Along with CSX, railroad operators Kansas City Southern (NYS: KSU) and Norfolk Southern (NYS: NSC) will be posting results on Monday and Tuesday, respectively. Investors should take note, as railroads provide a solid perspective on capital goods spending, an indicator for the broader economy. Likewise, Johnson & Johnson (NYS: JNJ) announces earnings Tuesday, which will provide an indication of where the consumer goods segment of the economy is headed in 2012.

While these companies can provide a glimpse of our near-term economic future, perhaps you're more concerned about the long-term success of your portfolio. In that case, take a minute to download the Motley Fool report "Secure Your Future With 11 Rock-Solid Dividend Stocks." Our analysts compiled a list of solid dividend-paying companies that can boost your portfolio for the long haul ahead. Thousands have downloaded the report, so get yours here for free.

At the time this article was published Fool contributor Isaac Pino owns shares of CSX. Follow him on Twitter @TMFBoomerThe Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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