Zacks Industry Outlook Highlights: Union Pacific Corp., CSX Corporation, Norfolk Southern Corp., Canadian National Railway Company, Canadian Pacific Railway and Kansas City Southern

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Jan 14, 2013, 09:30 ET

CHICAGO, Jan. 14, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Machinery, including Union Pacific Corp. (UNP), CSX Corporation (CSX), Norfolk Southern Corp. (NSC), Canadian National Railway Company (CNI), Canadian Pacific Railway (CP) and Kansas City Southern (KSU)

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Industry: Railroads

Link: http://www.zacks.com/commentary/25346/railroad-stock-outlook-january-2013

The vast expanse of the U.S. is covered by over 600 freight railroads comprising Class I, regional railroads and local line haul operators. These railroads operate across 150,000 miles of railroad tracks and generate over $50 billion in annual freight revenues.

Based on their operating revenues, freight railroads are categorized into three segments: Class I with annual operating revenues above $346 million, Class II with revenues in the range of approximately $27.8 million to $346 million, and Class III for the rest. Operating revenue based classification standards are provided by the Surface Transportation Board (STB). However, in the light of inflation and the changing macroeconomic environment, revenue benchmarks are subject to alteration.

Currently, there are 9 major railroads in America that are classified under Class I freight railroads. These include Union Pacific Corporation (UNP), CSX Corporation (CSX), Norfolk Southern Corp. (NSC), Canadian National Railway Company (CNI), Canadian Pacific Railway (CP), BNSF Railway, Kansas City Southern (KSU), Ferromex and Kansas City Southern de México (wholly owned subsidiary of Kansas City Southern Railway).

These carriers can be further categorized on the basis of their network of operations. BNSF Railway, Canadian National, Canadian Pacific, CSX Corp. and Norfolk Southern have their presence in the U.S. as well as the Canadian Market. Union Pacific operates only in the U.S. with no footprint in Canada or Mexico. It represents the largest freight railroad and operates predominantly in the western part of the U.S. Kansas City Southern Railway operates between U.S. and Mexico, Kansas City Southern de México and Ferromex cater only to the Mexican market.

Although these Class I carriers represent only 1% of the total freight railroads in America, these control more than 90% of freight revenues and employment generated in the industry. Consequently, Class I carriers are good indicators of the performance of the rail industry and are crucial when analyzing railroad trends.

The Track Ahead

However, railroads do have certain windows of opportunity, which can be banked upon. The key among these is the rise in intermodal alongside petroleum and automotive shipments.

Zacks Industry Rank

The Zacks Industry Rank, which derives its predictive power from the time-tested Zacks Rank, helps us identify the industries that are expected outperform others. The top 1/3rd of the Zacks Industry Rank qualify as industries with 'Good' prospects, the bottom 1/3rd have 'Bad' prospects, and middle 1/3rd as 'Neutral.' Most of the constituent 'industries' in the business services sector fall in the top 1/3rd of the list.

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