Railroads Haul More Containers in Q1

BNSF Railway Shops, Topeka

By Michael Hooper

A review of the weekly volume reports at BNSF Railway, Union Pacific and Norfolk Southern (NSC) shows that while carloads may be down so far in Q1, container and trailer volume is up. Ports have been backlogged with ships waiting to unload containers.

At Norfolk Southern (NSC) intermodal volumes -- containers and trailers -- were up 5% Year To Date through Week 9, ended March 6.

At BNSF Railway (owned by Berkshire Hathaway (BRK.B), container and trailer volume were up 14% YTD through Week 10, ended March 13. For many months there has been a backlog at the Los Angeles and Long Beach ports, where BNSF Railway and Union Pacific pick up freight and haul to Chicago and other places.

The ports in Los Angeles and Long Beach have been dealing with delays since June 2020, according to Ian Putzger in the Loadstar.

Container and trailer traffic at Union Pacific was up 8% YTD through Week 11, March 20.

Winter storms slowed down volumes of freight for the railroads in February, this harsh weather event, that included many days of freezing weather, will most likely affect first quarter earnings.

Union Pacific is trading with a 27 P/E ratio and a forward P/E of 19.9. The dividend yield on this stock is 1.82%. Historically, the yield on the stock is around 2% to 2.5%.

I expect volumes should be improving into the summer months.

Union Pacific, BNSF Railway, Canadian National Railway and Canadian Pacific will be the beneficiaries of all that freight coming into the west coast ports from Asia. Norfolk Southern and CSX (CSX) benefit from freight on the East Coast ports.

Railroad margins have improved in recent years, making these attractive investments. Net profit margins at Norfolk Southern (NSC) and Union Pacific (UNP) are around 26%.

There's so much pent-up demand among consumers; this demand will translate into more freight and merchandise being moved over rail and road. Financial metrics such as P/E ratio, yield and price-to-book ratios indicate these railroad stocks are trading above their historic averages, but there is a good reason to hold. There are just seven Class I railroads in the United States and Canada. Only six of them are publicly owned. With the potential for Canadian Pacific (CP) acquiring Kansas City Southern (KSU), there will be one less publicly-owned Class 1 railroad stock if the deal goes through.

Conclusion

I am bullish on rail stocks. Shippers will move steady-to-growing amounts of freight as we head into the summer months. These railroads are big cash machines with the ability to ebb and flow with the economy. The economy contracted during the pandemic of 2020, yet these railroad stocks were up. Railroads remain profitable and did not have to cut their dividends. I recommend holding these railroad assets for dividend income and modest growth in 2021.

Editor's note: The author owns UNP, NSC, CNI, BRK.B.