Growing Opportunities in Railways: Where Should You Invest?

Growing Opportunities in Railways: Where Should You Invest?

The railway transportation business sector has started to show abundant opportunities in North America following the slow but steady recovery of the U.S. More demand in construction and light vehicles, along with a record crop coming up in the region should drive better revenues for railway operators across the country. Plus, the sector is enjoying a strong pricing momentum, improving the overall profitability for many companies.

CSX: Lower coalrevenues
First, we have one of the nation's leading transportation suppliers, and owner of a 21,000 route-mile rail network, CSX .

Driven by better operating results and higher revenues, the company's third-quarter net earnings of $463 million grew 1.76% compared to the same period last year -- a satisfactory performance, but not necessarily an impressive one.

Nonetheless, CSX should benefit from favorable rail industry pricing looking ahead, which, along with operational improvements, should help grow the top line. Some trends, such as improved crop yields and increased vehicle production, are helping this operator. Considering that CSX delivers 30% of North America's light vehicles, we should see more cash coming in.

In the search for higher productivity, CSX management undertook several steps, including improvement in car cycle times, reductions in overtime, and other labor costs. These measures led to lower rent expenses, material usage, and labor costs per employee while improving its service. Moreover, it has introduced a targeted locomotive shutdown program and onboard technology to optimize its fuel usage.

However, continued declines in coal revenues are still a threat considering that this business line accounted for 27% of total revenues in 2012.

Kansas City Southern: Record quarterly revenue growth
Next we have Kansas City Southern , which has railroad investments in the U.S., Mexico, and Panama.

The company announced a record quarterly revenue growth of 8% for its third quarter. What's interesting is that although coal business is typically solid in the third quarter for Kansas City Southern, in this case it fell 2% due to the fact that this summer was mild, and that natural gas prices remained low. Still, the company managed to grow at a record level, and that's not a minor achievement.

Another remarkable aspect about Kansas City Southern is that with 4%-5% annual price hikes, the company manages to maintain a double-digit profit margin. Why? This operator benefits from a unique position in terms of logistics, since it is the only railroad with service networks across both sides of the U.S. and Mexico border, dominating the primary rail networks between these countries. Consequently, the cross-border intermodal business opportunities are enormous, especially considering the cheaper labor and transportation costs in the Mexican market. In fact, cross-border intermodal increased 73%.

Canadian National Railway: Record crop coming ahead
Finally, we have Canadian National Railway , which operates the largest rail network in Canada.

Canadian National Railway improved its top and bottom line in the third quarter compared to the previous year. Revenues grew 8% year over year and operating ratio hit 59.8% on the back of higher train productivity and velocity. Nonetheless, operating expenses increased 7%.

This company has been improving its service levels on the back of technological innovation and industry consolidation. Thanks to these improvements, Canadian National Railway has managed to hike its freight rates and still manages to gain market share thanks to good rail freight conversion levels. Considering that Canada will probably have a record grain crop, and that the U.S. grain crop should be above the five-year average, this operator should profit from higher capacity use.

However, despite better operational metrics, weakness in some product lines, like potash, along with higher expenses are causes for concern.

Final thoughts
CSX's major segments are enjoying strong growth levels, and this trend is expected to continue in the coming months. Even though this growth offsets the continuous decline in coal revenue, this variable should be closely monitored as it is very significant to the company's total profits.

Kansas City Southern is in great position to keep profiting from intermodal traffic. It is a solid revenue generator for mid-term and long-term investments without a doubt.

Canadian National Railway should be able to benefit from better crop yields, but this impact will be limited considering that grain and fertilizers accounted for 13% of revenues this quarter.

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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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