Don’t Overlook This Mature Sector That’s Beating the Street

Long-time readers of this column know of my affinity for railroad stocks. I like keeping things domestic; I like keeping things simple; and I like consistent growth—in revenues, earnings, and dividends.

Railroad stocks are benchmarks on the North American economy. What they report is real, definitely worthwhile noting, and a sort of canary in the coal mine for both the old economy and Main Street.

My top benchmarks and my two favorite railroad stocks are Union Pacific Corporation (UNP) and Canadian National Railway Company (CNI).

Another good one, CSX Corporation (CSX), which is based in Jacksonville, Florida, has 21,000 miles of track in 23 states, the District of Columbia, and two Canadian provinces. It reported solid earnings results that beat the Street.

It’s important to remember that a company like CSX is a mature business; you’re not going to get burgeoning biotech-like earnings growth from railroad stocks.

CSX reported a solid earnings of $535 million, or $0.52 per share, up about four percent nominally and six percent on an earnings-per-share basis from $512 million, or $0.49 a share, in the comparable quarter.

Revenues came in at $3.069 billion for a gain of about two percent from revenues of $3.012 billion in the second quarter of 2012.

The company’s cash position dropped approximately $360 million to $1.017 billion. Shareholders’ equity grew $660 million to $9.662 billion.

The company cited strength in chemical shipments and the continuing upward trend in railroad stocks. From the 2013 base, CSX expects to generate per-share earnings growth of between 10% and 15% through 2015—that’s a very solid expectation.

Railroad stocks started to soar just before the subprime mortgage-induced financial crisis took hold. But like everything else, they corrected significantly, and then they accelerated again into what can only be described as major Federal Reserve/Wall Street capital gain. While modest, there is real growth in mature railroad stocks.

Practically, it’s difficult to consider buying these stocks today after such significant capital gains from most positions within the group.

I always recommend thinking long-term and being cyclical when thinking about accumulating railroad stocks. (See “How Extraordinary Growth in Bakken Oil Is Revitalizing Railroads.”)

Comparatively, Union Pacific and Canadian National have been standouts in terms of their stock market performances within the group. Canadian National is one of Bill Gates’ largest holdings in his private investment firm and his charitable foundation.

I recognize that not everyone has an affinity for such old economy stocks. They definitely are a throwback to another era. But if anything, railroad stocks are worth following for the simple reason that they are the backbone of the economy and what these corporations say about their businesses is material to the stock market and your own outlook.