Winning Railroad Stock a Buying Opportunity?

railroad stocksThe stock market has gone up tremendously and the pressure on interest rates will continue.

Among the many benchmark stocks that I follow, I’ve noticed 2014 Wall Street earnings estimates have been nudging higher.

In a role reversal, Union Pacific Corporation (UNP) has been taking a break, even though the company’s latest quarter was solid and earnings expectations have been boosted for next year.

This is perhaps a subtle indicator that the bull market in equities is moving away from the old economy names that led the run upward over the last couple of years. Most of the other railroad stocks are still pushing new highs. Union Pacific’s share price consolidation has been going on since May.

The company’s price action is definitely worth following now. There is very little value in the stock market today, but Union Pacific’s share price is not expensive; it has the lowest forward price-to-earnings ratio of the railroad group.

If the stock’s consolidation continues or there is a major price retrenchment, Union Pacific could be a buying opportunity for those interested in owning a railroad company.

I’m still inclined to believe that existing stock market winners like Union Pacific are worthy of consideration when prices are off their highs. With the expectation that U.S. economic growth is going to accelerate next year (compared to 2013), combined with a healthy balance sheet and good prospects for a dividend increase, Union Pacific’s coal and grain shipment problem is manageable.

The third quarter of 2013 saw the company report record financial results, as well as its best operating ratio at 64.8%. The company spent $575 million in the third quarter buying back 3.7 million shares at an average price of $156.77 per share, and management boosted its quarterly dividend by $0.10 a share to $0.79.

The other railroad that I’m fond of is Canadian National Railway Company (CNI), which has substantial infrastructure in Canada and the U.S.

The problem with this stock now is that it’s gone up so much. (See “My Two Favorite Railroad Stocks.”) The company was also in a major consolidation since March, but it recently experienced a strong breakout in October, appreciating another 10% on the stock market. I like Canadian National long-term, but I don’t believe in chasing positions.

And that is exactly why Union Pacific is a worthy stock to put on your radar now if you’re a long-term income investor.

Not all investors are interested in old economy-type companies in a portfolio, and that’s fine. I think a long-term portfolio benefits from a real mix of sectors. And as individual stocks outperform or underperform the market, you can adjust your weighting accordingly. Either take some money off the table or add to positions as conditions warrant.

Currently, I don’t look at Union Pacific as a stock I’d want to lighten up on, given current information: The company’s fundamental picture going into 2014 is excellent.

Valuation, the prospect for a further increase in dividends, the company’s operating metrics, and resurgence in automobile, industrial, and oil railcar shipping bode well for its outlook.