How High Can RailAmerica Fly?

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Shares of RailAmerica (NYS: RA) hit a 52-week high yesterday. Let's look at how the company got here and whether clear skies are ahead.

How it got here
RailAmerica has rocketed higher this year partly because of improving earnings and speculation of a buyout or asset sales. The rail operator controlled by Fortress Investment Group (NYS: FIG) said this month that it was already in talks with third parties as part of a review of options, and the market is betting on a sale. A recent Bloomberg article stoked the fire again by prediction that a sale could bring a 30% premium beyond the gain we've already seen this year.

The confidence from the market is new for this small rail company. Until recently, RailAmerica was underperforming rivals like Genesee & Wyoming (NYS: GWR) , Norfolk Southern (NYS: NSC) , and Union Pacific (NYS: UNP) on the market but the speculation has been pushing shares higher. Five straight quarters of outperforming expectations doesn't hurt either.


RA Chart

RA data by YCharts

The argument made by analysts is that further cost reductions are possible at RailAmerica, which would justify a higher price in a buyout. As you can see below this isn't a far fetched idea with profit margins as low as they are.

RailAmerica1.95.8%(1.3%)15.6
Genesee & Wyoming2.25.3%14.2%14.7
Union Pacific2.98.6%17.4%12.1
Norfolk Southern2.27.3%17.6%10.1

Source: Yahoo! Finance.

For now, investors should focus on the steady improvement in earnings, which will continue to drive shares even if a buyout doesn't happen.

What's next?
Betting on buyouts is a risky game, and if you buy RailAmerica at this new high, I wouldn't do it because of that. But as I pointed out above, there does appear to be room to enhance profitability and improve operations, so this wouldn't be a bad buy here.

Personally, I would stick with a cheaper railroad stock like Norfolk Southern, which also pays a strong dividend. CAPS members have other ideas, giving RailAmerica stock a five-star rating (out of five), and 106 think it will outperform the market. The fast jump in shares just has me worried that the stock will soon slow down. After all, the railroad business isn't exactly known as being one of the fastest growing businesses on the market.

Interested in reading more about RailAmerica? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

At the time this article was published Fool contributor Travis Hoium rides Reading Rail and does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Motley Fool newsletter services have recommended buying shares of Genesee & Wyoming. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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