One of the great untold stories of the rebounding economy is what’s unfolding in the Western part of the country.
There’s a perfect storm in the West that’s causing serious rail congestion. But while this is bad news for some companies, other companies should be able to capitalize on it.
The harsh winter didn’t help with rail congestion. The crude oil coming out of the Bakken is also taking up rail space.
Union Pacific and Warren Buffett’s BNSF are the only two major U.S. railroad operators that offer service to states west of the Mississippi River. Canadian Pacific also has a strong presence in the West.
CSX and Norfolk Southern both operate east of the Mississippi River. Union Pacific’s only real competition is Warren Buffett’s BNSF Railway.
Things have gotten so bad that the Surface Transportation Board now requires BNSF and Canadian Pacific to file weekly reports on its efforts to clear up backlogged rail traffic. But Union Pacific is not required to file backlog reports. BNSF has previously stated it will take until year end to get the traffic jam worked out. Some of BNSF’s cars are over three weeks late.
Union Pacific (NYSE: UNP) is perhaps the best-kept secret in the West.
Its trains were running faster than BNSF’s last month, with speeds above 24 miles per hour, while BNSF was closer to 21 miles per hour. As a result, Union Pacific is gaining market share from BNSF. For the second quarter, its carloads rose 8.2%, while BNSF’s carloads were up only 4.9%.
Union Pacific should also be able to capitalize on its market share gains by raising prices. Over 30% of its business is not under contract, allowing the company to boost prices as necessary. Compare that to its East Coast peers, which have around 90% of their books under contract. During the second quarter, Union Pacific was able to boost core pricing by 2.5%.
Also, during the second quarter, Union Pacific’s operating ratio was 63.5%, which was a company record and comes in below its peers. A lower operating ratio means rising margins.
But its position as a top operator in the Western part of the country isn’t the only reason that Union Pacific is the best railroad operator to own. It also has access to Mexico.
That is a big positive for Union Pacific’s auto business. Union Pacific has access to all six of the U.S.-Mexico gateways. As a result, it’s responsible for four-fifths of the auto shipments in and out of Mexico.
Thus, a continued rebound in auto sales and the fact that Chinese labor is becoming more expensive is a big positive for Mexico.
Crude-by-rail is also a very fast-growing part of the rail market. In 2013, there were over 400,000 carloads of oil and natural gas transported via railroads. That’s a 75% increase from 2012 and nearly 14 -times more than the 29,000 oil and gas carloads in 2010.
It just so happens that BNSF is the leader in originating carloads of oil and gas, accounting for four-fifths of all oil and gas carloads in 2013.
Going forward, a big factor for Union Pacific will be its ability to keep its market share gains from BNSF. That could give it a stronger position in the fast-growing crude-by-rail transportation business.
Union Pacific is also one of the cheapest railroad operators around. It trades at a P/E ratio of 15.6 based on next year’s earnings estimates.
Union Pacific’s P/E to growth (PEG) ratio, at 1.3, is the lowest of all the major train operations. Union Pacific offers a 1.9% dividend yield.
All in all, Union Pacific will be a big benefactor of rebounding economy and should manage to pick up market share from BNSF. This makes Union Pacific a perfect play on the rebounding economy and the continuation of the energy boom in the U.S.
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