Railroads are increasingly transporting time-sensitive and higher-value freight, driving growth in the sector as volumes and margins continue to soar, says John R. Mims, a Vice President at BB&T Capital Markets.
“More than 80% of this freight currently moves by truck versus less than 12% for the rails,” Mims said. “But as rail service levels improve and highway congestion, fuel prices and environmental regulations increase the cost of highway freight, more of this freight will move onto the rails. This is a secular story that will drive growth for perhaps the next 10-plus years.”
Mims has “buy” ratings on CSX Corp. (CSX) and Union Pacific (UNP). CSX built a route that competes with highways, called the National Gateway, and UNP is preparing to renew 12% of its contracts at rates as high as 40%-60% over current levels.
“[The] ‘buy’-rated names are targeting a percentage point or more of operating margin improvement per year over the next several years, and that will have a very meaningful impact on earnings and stock performance from here,” Mims said.
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