American Railroads

News each weekday of American railroads. Our focus is on freight rail, but Amtrak and commuter rail are also essential ingredients. Nothing published on holidays.

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Location: Middleburg (Jacksonville), Florida, United States

Published in Trains magazine, Railfan & Railroad, Passenger Train Journal

Tuesday, September 19, 2006

Railroads roll into Wall Street’s favor

Several brokerages jumped aboard the railroad industry Tuesday with favorable stock ratings, saying shipping capacity remains tight for this fall – supporting a better revenue picture – and forecasting a solid sector performance in the event of an economic slowdown or a recession.

Citigroup initiated buy ratings on shares of BNSF Corp., MarketWatch reported yesterday. Citigroup analyst John Kartsonas expects the industry’s price-to-earnings multiple to move toward the upper end of its historical range, in the belief that “the relatively tight capacity that has characterized the industry over the past few years... should provide ongoing support for strong yields.”

While Citigroup said railroads should continue to be cyclical, constricted capacity should drive the current cycle, rather than a shift in demand.

In his research report, Kartsonas said that BNSF should continue to benefit from shipping coal from western states, that Norfolk Southern will likely enjoy the lowest operating ratio among U.S. railroads, and that CSX appears undervalued as it increases productivity and exhibits better flow in its network.

Lehman Bros. also weighed in on railroads’ prospects as an investment play early Tuesday.

Should the U.S. economy slow, according to Lehman, railroads should perform generally in line with past downturns. However, they’re then likely to “outperform significantly upon emergence from recession or if economy surprises to the upside,” in the view of Lehman analyst Gary Chase.

if a downturn of what he called “historical magnitude” materializes, the rail industry’s ability to generate cash should vastly exceed prior troughs, Chase wrote clients.

The brokerage’s preference order for railroad shares is BNSF, upgraded to overweight from underweight; Union Pacific; and then CSX and Norfolk Southern, both cut to equal-weight “given the forced nature” of Lehman’s ratings system.

“Railroads in particular have been oversold of late,” according to Chase.

“Signals from the broader economy are a bit cloudy, but less important as we believe the shares are increasingly discounting a recessionary impact consistent with history.”

BNSF offers investors an industry-leading growth rate, without a premium, Lehman noted.

Also Tuesday, analysts at Stifel Nicolaus reiterated buy ratings on five of the six major railroads, but they cut earnings estimates slightly for Canadian Pacific and Norfolk Southern. Canadian Pacific shares remain at hold.

Canadian Pacific is witnessing a decline in coal volumes, while Norfolk Southern’s revised estimate reflects a bigger-than-expected decline in automotive traffic in the third quarter, wrote the analysts.

Metro-North commuters lobby to keep bar cars

Metro-North Railroad riders are worried they may lose a staple of their commute – their bar car.

State transportation officials said last week they have no intention of eliminating bar cars, but the state has not included them in an initial order of new cars. That concerns supporters of the bars on wheels.

A commuter council is asking Metro-North riders for their opinions on the matter. One frequent bar car patron says the council's goal is to keep the bar car.

The bar cars are profitable, but other railroads, including Metro-North’s Hudson and Harlem lines in Westchester County, N.Y., have phased out the service to add more seats.


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