Riding the rails

Money Report

Are trains big and small making a comeback?

Riding the railsA model train chugging merrily around the Christmas tree with a pint-sized conductor in pajamas and railroad cap is as recognizable an icon of the holiday season as stockings on the mantle. Retro or not, model trains are still alive and well, still the province of small boys and middle-aged men, and still a perennial best seller at Christmas time.

Unfortunately, the companies that make model railroads aren’t publicly traded or available for investment. The best known of these — Lionel Trains, Marklin and LGB — have been around for decades, and their offerings are broad enough in variety and cost to not disappoint any parent who feels this year’s Christmas tree wouldn’t be complete without locomotives, track and transformer.

On the other hand, you can ride the rails with the big boys. Recently, investor interest was refocused on the railroad transportation industry, when Warren Buffett announced that his firm Berkshire Hathaway would pay $100 per share in cash and stock for the 78 percent of Burlington Northern Railroad (BNSG) it didn’t
already own. The price, $34 billion, was a 31.5 percent premium to the current market price at that time, and widely seen as a bet on the long-term recovery of the American economy. Burlington Northern is the nation’s second largest railroad, and the largest in terms of hauling foodstuffs and coal.

Although they haven’t been particularly rewarding thus far in 2009, investors are now watching the three other mega-railroads that haul the balance of the nation’s freight, CSX Corp (CSX), Norfolk Southern Corp (NSC) and Union Pacific (UNP).

UNP was founded in Omaha in 1862, and runs 32,000 miles of track system, primarily in the western United States. The company has a market cap of more than $31 billion, and has earned a return on assets of 5.43 percent and a return on equity of 12.49 percent over the trailing 12 months. It’s currently trading at $62, 15.7 times its trailing earnings per share of $3.97. UNP pays a quarterly dividend of $1.08, giving it a yield of 1.7 percent.

CSX operates a 21,000-mile rail network, primarily in 23 states east of the Mississippi River, as well as the Canadian provinces of Ontario and Quebec. Based in Jacksonville, Fla., CSX has a market cap of $18.7 billion; its return on shareholders equity has been 12.32 percent, and is currently selling at $47.69 per share, roughly 17 times per share earnings of $2.77, with a yield of 1.8 percent.

Norfolk Southern, based in Virginia, also runs its freight in the eastern U.S. with more than 21,000 miles of rail lines. NSC has a market cap of $19.16 billion, and 367 million shares outstanding.

Its current selling-at price is $52.07, 16.5 times its per share earnings of $3.16. NSC has a $1.36 dividend, a yield of 2 percent. Investors holding these stocks over this past 12 months have seen mixed results, with Union Pacific just about even, Norfolk Southern off 5.5 percent, and CSX with a gain of 11.8 percent.

Steven Weber is a registered investment advisor and director of investments for the Bedminster Group, providing investment, estate and financial planning services, with offices on Hilton Head Island and in Bluffton. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the author and do not necessarily reflect those from any other source. All prices are as of November 2009 and are meant for illustration purposes only.