Top 3 Best Railroad Stocks to Buy Now? (2019 Review)
Today’s article surveys the best railroad stocks in the stock market.
Railroad stocks caught on a few years ago when Warren Buffett took a large stake in the sector. Suddenly a very boring industry became interesting after Berkshire Hathaway bought in.
Railroads have always been the transportation backbone of our country. Not much attention was given to railroads or railroad stocks because of the perception that railroads are a thing of the past.
Not so. Trains may seem like broken-down old antiques of the 1800’s, but they remain a critical part of the American economy.
The idea is simple: goods and raw materials need to be moved to keep the economy moving. Some objects are too big for planes and trucks. Railroads thus become the obvious solution.
Railroads are safe, the technology is not terribly complicated to run them, and there is a vast network of rails throughout the country.
For a long time, railroad stocks suffered under onerous regulations. When President Trump came into office, he cut back on those regulations, and railroad stocks have only gotten better.
The Best Railroad Stocks For 2019
If you’re in a hurry, below are our picks forthe most valuable railroad stocks as of this writing.
- CSX Corporation: The leading hauler of goods via railroad.
- Canadian Pacific Railway: Exploding earnings drive its stock higher.
- Norfolk Southern: The railroad has a massive network and strong diversification.
Keep reading and you’ll learn more about each of these winning railroad stocks and my thoughts on each.
What Are Railroad Stocks?
The top railroad stocks can come from several different categories, although our choices stick to just the first category.
That first category concerns freight railroads. As the name implies, these are companies that own and operate their own trains that carry freight all over North America. As mentioned, there are so many goods, raw materials, and energy products like oil and natural gas, that can only be shipped by freight railroads.
A second category are what’s known as shortline railroads. You may recognize the term as being one of the spaces in the board game “Monopoly”. Shortline railroads exist for one of three reasons. They either link to industries together that require freight trains, to interchange revenue traffic with other larger railroads, or perhaps operate a passenger train service.
The third category are railroad manufacturers and suppliers. These companies actually build the trains themselves, the rails, the tracks, and the management systems.
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How Do You Determine What Qualifies As The Best Railroad Stocks?
The best performing railroad stocks have these three characteristics:
- Constant, but cyclical, business
- Strong cash flow
- Regular dividend
Constant, but cyclical, business
No matter what state the economy is in, both raw and finished materials need to be transported. Economic activity simply doesn’t grind to a complete halt. However, the economy moves in cycles. As a result the demand for raw materials and finished goods is going to fluctuate based on economic cycles.
What we want to see in the most valuable railroad stocks is a constant source of business, with the understanding that growth is going to ebb and flow based on the economic cycle.
What we don’t want to see is a huge drop-off in business even in an economic downturn.
Strong cash flow
You probably have noticed that having strong cash flow is a characteristic I assigned just about any stock in any sector that is worth purchasing. That’s because cash flow is literally the circulatory system of any business.
This is true for the top railroad stocks as it is for any other company.
When business is booming, large freight railroads can take advantage of their economies of scale, and be more efficient with their expenses. That allows them to generate regular and robust cash flow.
That cash flow is essential, not only because even the top railroad stocks require a lot of capital expenditures to keep the trains running, but to create a warchest for when the economy inevitably suffers.
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The best railroad stocks don’t just produce cash to keep the business running. The strongest railroad stocks also make enough cash so that investors get paid an incentive for investing in solid railroad stocks in the first place.
Paying regular dividends to stockholders is also of interest to retired investors, who rely on those regular payments to supplement their income.
Here’s a video that gives additional information on investing in railroad stocks.
What is it?
CSX provides railroad transportation services in North America. Its trains carry just about anything you can imagine that is available in bulk: chemicals, automotive product, agricultural and food products, fertilizers, metals, coal, minerals, and forest products.
What makes it a good stock?
CSX is producing record net income, which is why I’m naming it as one of the top railroad stocks going in to 2019.
I consider a company to be a growth stock if analysts project annualized earnings growth at 15% or more over the next five years. In the case of CSX, analysts are pegging growth at a whopping 22% over the next five years.
And yet, CSX stock only trades at about 19 times this year’s earnings of $3.82 per share. So while it is a growth stock, because it trades at an earnings multiple that is below its growth rate, it also is considered a value stock. Thus, I place CSX in the category of GARP stock – Growth At A Reasonable Price.
CSX is generating solid profits. In 2016, CSX generated $1.7 billion in net income. That more than tripled to $5.46 billion in 2017, generating over $1.38 billion in free cash flow at the same time and paid a 1.26% yield.
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Canadian Pacific Railway
What is it?
Canadian Pacific Railway stock is a transcontinental freight railway in Canada and the United States. The company moves bulk commodities and merchandise freight, as well as energy, forest, industrial, and consumer products. Its network consists of 12,500 miles across all of Canada and America’s northeast and Midwest.
What makes it a good stock?
Canadian Pacific Railway is one of the top stocks for 2019 because its growth and earninsg are, simply put, on fire.
For the third quarter of fiscal 2018, it generated $622 million in net income, or $4.35 per diluted share. Those earnings grew 20% from the year-ago quarter, when it collect net income of $510 million, or $3.50 per share.
Further up on the financial statements, we see that operating income came to to $780 million, which was also an impressive 27% year-over-year gain. That’s because of the 19% increase in revenue, which hit $1.9 billion.
Energy, chemicals, and plastics were a major growth point for the company, up 58% over last year, showing the strength of the overall economy.
It generated $3.6 billion in free cash flow over the past twelve months and paid out about 30% of it as a 0.95% dividend.
While investors may be worried about the trade war with China, since steel is a major commodity involved in the company’s transportation, there’s not much to be concerned about.
Direct business between the US and China is only 5% of North American revenues.
What is it?
Norfolk Southern transports raw, intermediate, and finished goods of coal, automotive products, and industrial products. It has just under 20,000 miles of network across 22 states.
What makes it a good stock?
Like its other peers, Norfolk Southern will be one of the winning railroad stocks in 2019 because its earnings are exploding thanks to its diversified business.
In the fourth quarter, earnings per share increased 26% to $1.64 per share, thanks to a 7% gain in revenues to $2.9 billion.
I like Northfolk because its diversification is really coming in to play. Coal has been dying in America, so it offset those weakening revenues with its intermodal and merchandise shipping businesses. This includes crude oil, shale-related liquid petroleum gases, and frac sand shipments.
It is these intermodal and merchandise shipments that keep the business alive.
It generated $4 billion of free cash flow in the past year, and paid out about 70% of it as a dividend (1.95% yield).