Many companies besides the major railroads will benefit from resurgence of railroad industry

Implications: The Class I railroads have boosted their earnings and share prices in recent years by increasing their freight rates much faster than their costs have risen, both fuel and labor. The high price/earnings multiples of their common shares (ranging between 17 and 21) attest to many investors’ belief that the rate increases and the resulting earnings growth will continue for some time. For more cautions investors, however, there may be ways to invest in this industry without having to worry about peaking stock prices. Wabtec (WAB) and Trinity Industries (TRN) are just a couple of the good companies that look to be well positioned for future growth.

Analysis:

Railroad traffic has grown at a very predictable and steady pace for the past century, so the current prediction that traffic will rise 90% by 2035 is a pretty safe bet. Railroad ton miles have increased 90% in the last 27 years over 300% in the last 54 years. During the latter periods however, regulation and excess capacity hindered many companies in this industry. Both of these problems are gone and expansion is the new watchword of the industry, and there are many rail related companies that should be able to prosper in this new environment.

 

Wabtec is an old line company with a new technological orientation. It is growing both organically and by acquisition, and will benefit both from the growth of the industry in general and from the increasing attractiveness of its products. Its high P/E ratio of around 22 is not dependent on its pricing power and its prospects for growth are limited only by the imagination of its managers. Trinity Industries has also been well positioned to grow with the railroad industry by its management team. With new railcar sales dropping, Trinity has reorganized and reinvigorated it railcar leasing business with renewed confidence has reclaimed market share lost during the pricing wars of the last recession. Its low P/E ratio around 9 is perhaps due the general pall over financial services companies.

 

On a similar tack, GATX (GTM) is also trying to grow its railcar leasing business by pursuing both the GE and CIT’s railcar fleets. If either transaction is completed, it will make GATX the largest railcar leasing company in the industry at a time when the leasing business has more potential for growth than any time in the last 30 years. If neither sale happens, don’t look for this company to give up on expanding its market share in this industry. GATX’s P/E ratio of around 10 suffers from the same concerns that hurt Trinity.

 

Another company involved in railcar leasing and other railroad industry activities is The Andersons (ANDE). It is a diversified company with roots in the grain industry and new ventures in the ethanol industry. It trades with a P/E around 10 and is expanding its railcar leasing activities more organically than through acquisition, but there are some possible synergies between its divergent industries which may allow for more growth.