Top Sector Offering More Capital Gains

The One Sector with More Capital Gains to ComeWhile business conditions are pretty good in the domestic oil and gas business, they’re also holding up very well in the railroad sector.

If railroad companies and related services are old economy, they are still important economic benchmarks and they continue to be great businesses producing excellent returns to stockholders.

Union Pacific Corporation (UNP) is an important company to follow, even if you aren’t interested in owning a position. What the company reports about its business conditions is material and helpful in advancing your own market view. Union Pacific reports on Thursday.

Norfolk Southern Corporation (NSC) just hit an all-time record-high on the stock market. This time last year, the stock was around $77.00 a share; now, it’s close to $107.00.

CSX Corporation (CSX) is not as large in terms of market capitalization as Norfolk Southern or Union Pacific, but it is still a $31.0-billion company with extensive operations in the eastern United States and Canada.

Its second quarter of 2014 was a record quarter with sales growing seven percent to $3.2 billion on an eight-percent gain in volume.

Earnings growth was more modest, coming in at $529 million, or $0.53 per diluted share, compared to $521 million, or $0.51 per diluted share, for second quarter 2013. But management expects margin expansion going into 2015, and the Street wasn’t fazed.

Like so many other large-caps, the company is buying its own shares, including some $131 million worth during the most recent quarter.

By April of next year, the company will have spent $1.0 billion on share repurchases over the last two years.

Notably, CSX saw double-digit volume and revenue gains from agriculture freight, chemicals, metals, and waste and equipment.

The company’s biggest gain was in chemicals, which improved 18% by volume and 17% in sales over the second quarter of last year. This was due to growth from the energy sector, including the shipment of crude oil, liquefied petroleum gas (LPG), and fracturing sand.

I think a railroad company is a welcome addition in any equity market portfolio, particularly at this stage of the business cycle, where railroad companies are experiencing an increase in the shipment of freight.

Recognizing that these stocks have already gone up as institutional investors have placed their bets, there’s still room for more capital appreciation within the group. (See “Why These Stocks Are a Leading Indicator of the Market and What They Foresee Now.”)

I continue to like Union Pacific and Canadian National Railway Company (CNI), which has extensive rail tracks in both Canada and the U.S.

Canadian National Railway just reported a 17% gain in second-quarter revenues to $3.12 billion in Canadian dollars, with a 14% improvement in revenue ton-miles and an 11% gain in car loadings, comparatively.

The company’s earnings grew nicely to $847 million, or $1.03 per diluted share, up substantially from $717 million, or $0.84 per diluted share, year-over-year.

Company management boosted its full-year outlook slightly, stating that it expects double-digit earnings-per-share growth this year compared to adjusted diluted earnings per share in 2013.

For the most part, corporate performance among railroads and service companies remains excellent and these businesses are well positioned for earnings growth as the U.S. economy slightly improves in the bottom half of the year.

I expect more capital gains from this sector to come.