Union Pacific Corp (UNP)

A good company; which he thinks you can buy right now. Rails have a huge advantage in that railway companies are not being built, it is very hard to get rights of way, very hard for them to be amalgamated with others. You are buying it now at an extremely attractive valuation.

Rails are an interesting view into the economy. The only thing showing any kind of strength for the rails is the auto area. That indicates the economy is a slow growth economy and that industrial America is one of the weakest parts. The consumer is probably where the strength lies in the economy. This is trading where it should be in the 11 to 12 times earnings area. There isn’t any hurry to get into this.

This has had a heck of a correction, almost 50%. The problem is that the earnings forecast has been rising and rising, and has now turned and is going down. This is a reflection on the movement of goods in the US economy, including away from the ports. He had a “bounce target” of $66. To get the stock really, really cheaply, you want it to get down to 2X Book which is $53-$54. He would be afraid of another 10% drop in the market. If it did, this would then be beautifully cheap.

Stock has dropped dramatically from $122 to $84, but it was too expensive to start. This brings it down into the 13, 14 multiple, which becomes more reasonable. 20% of their shipments are coal, which is a big negative. Have managed their operating ratio quite well, down to the mid-60s, which is a big positive for them. He is neutral on this.

Technically the chart shows it is in a downward trend. It is underperforming the S&P 500 and is currently trading below its 20 day moving average. Seasonally the stock usually does well from around the middle of October right through until March of each year. A word of caution. It is not unusual for railway stocks to go into a corrective phase right around the end of July.

They have done good things. The problem he has with this and all rails is valuation. The drop in price is helping the valuation. Trading at about 15X this year’s earnings and is starting to get into range, but it is at the high end of its historical range. He would like to see it correct a little more. About 18% of their revenue comes from coal. Also, oil by rail has hurt, but that is very much a temporary situation. On the plus side their intermodal business is very good. You could step in now and in time you will do well, but he would like to see a drop another 5%-7%, which would be a great entry point.

He owns and prefers CNR-T. This is a great industry. They are great for transporting as opposed to trucking. There is a chance you can buy it a little cheaper. They had soft volumes last quarter due mainly to oil. UNP-N has outperformed CNR-T, not taking currency fluctuations into account.

US rails have oil that they have been carrying, but they also have coal, and the demand for coal has been going through the floor, so the volumes they were carrying are not there.

CSX (CSX-N) or Union Pacific (UNP-N)? Using CSX as a constructive way of playing the strength of the US economy is proving not to work out. The US economy is not as strong as some had thought. This one is probably a little better run in terms of operating ratios, but a little more expensive. He would probably pass on both of these.

(A Top Pick April 4/14. Up 16.9%.) Still likes the rail sector. It has taken a little bit of a beating in the last quarter. Inventory for coal and agricultural products are actually very high, so the carload growth has been muted for the industry as a whole, only up 1%. She thinks the stock is now consolidating and this is a good entry point. They have increased their dividend a lot in the last year. This gives you good income.

This is his preferred rail company in North America. Serves the Western US with exposure to the Mexican corridor. It serves the region that has the lowest cost basin, so doesn’t have the same negative headwinds as the Eastern rails. Trading at roughly 14.5 X forward earnings. Yield of 2.03%.

(A Top Pick Feb 19/14. Up 37.07%.) One of the better names in its space because of its dominance in Western United States and its ability to connect to Canada. But also has 26% ownership of Ferromex, Mexico’s biggest railway. Expect Mexico will be experiencing a lot of infrastructure.

CSX (CSX-N) or Union Pacific (UNP-N)? Both names are great. You are certainly getting exposure to the recovering US economy. In terms of valuation, he thinks this one is slightly better. It is a much bigger company. He doesn’t think you will see a tremendous performance difference between the 2 names. 100% of revenues come from within the US, so they don’t have the risk of revenues coming from overseas with the US$ headwinds against them.

CSX Corp (CSX-N) or Union Pacific (UNP-N)? These are both good companies. Railways are a way to play North American growth. There is a little bit of headwind in the 1^st quarter here because of some port closures and strikes going on in the West Coast. This will interrupt flows from the intermodal business for both players. He sees Union growing a little bit better. Not a buyer at these levels, and has been trimming his position in this one a little.

(A Top Pick Feb 14/14. Up 39.1%.) This rail is on the West Coast of the US. Extremely well-managed. Intermodal business is growing, and they are taking share from the trucking industry. Had the 2^nd best operating ratio in the 4^th quarter. Also, have a part ownership on a railway in Mexico.