Zacks Analyst Blog Highlights: Union Pacific, Kansas City Southern, CSX, Norfolk Southern and Canadian Pacific Railway

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Mar 28, 2011, 09:30 ET

CHICAGO, March 28, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Union Pacific Corp. (NYSE: UNP), Kansas City Southern (NYSE: KSU), CSX Corp. (NYSE: CSX), Norfolk Southern Corp. (NYSE: NSC) and Canadian Pacific Railway Ltd. (NYSE: CP).

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Here are highlights from Friday's Analyst Blog:

U.S. Railroads Expect Bright 2011

Freight rail is a "derived demand" industry -- demand for rail services is tied to the demand for the products that railroads haul. Rail traffic, therefore, acts as a solid barometer of the overall health of the economy. With the U.S. economy emerging from the recession, the fortunes of the railroad industry are also on the mend. Several railroad operators have expressed their confidence that growth rate of business volume in 2011 will exceed the U.S. GDP and industrial production growth rate. Similarly, core pricing gain in 2011 will also exceed inflation.

Several positive trends (both macro-economic and inter-industry) are helping the U.S. freight railroad operators to significantly increase their capital expenditures. Association of American Railroads (AAR), the main trade body of the industry, reported that the freight railroads will spend a record high $12 billion in 2011 manpower recruitment, installation of new rail tracks and other capital projects. The railroad industry is expected to hire 10,000 new employees in 2011.

Investment by railroad operators for product and service improvement is far ahead than other transportation industries. Very few U.S. industries can match with the railroad operators with respect to high capital investment rate. Fiscal 2010 witnessed a record breaking $10.7 billion capital investment, which is now expected to grow by another 12%-13% in 2011. Investments in capacity, innovations and use of several state-of-the-art technologies led to service improvements and enhanced reliability.

Recommendation

An improving U.S. economy, massive surge in automotive shipments, and a sharp rebound in many end markets are expected to fuel the future growth of the Railroad industry. Currently, we remain Neutral on Union Pacific Corp. (NYSE: UNP), Kansas City Southern (NYSE: KSU), CSX Corp. (NYSE: CSX), Norfolk Southern Corp. (NYSE: NSC) and Canadian Pacific Railway Ltd. (NYSE: CP). However, due to strong growth momentum of the industry, our long-term view remains positive for all these Class 1 freight railroad operators.

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