Transports Are Back in the Next Leg of This Bull Market
Any way you slice it, Union Pacific Corporation (NYSE:UNP) stock has got to be on your watch list.
It doesn’t matter how boring a railroad operation might be to you—what a railroad reports is material intelligence for the domestic economy and the stock market.
The fact of the matter is the right railroad stock has proven to be a worthy addition to a long-term, investment-grade portfolio.
Not surprisingly, Warren Buffett bought Burlington Northern Santa Fe outright. Not only did he make billions on the surge in oil railcar transportation, rail and intermodal rail freight has always been a good business to be in.
Two of the best railroad companies in North America are Union Pacific and Canadian National Railway (USA) (NYSE:CNI). The largest single shareholder in CNI stock is Bill Gates.
And you just can’t go wrong following the weekly, monthly, and annual rail traffic data provided by the Association of American Railroads, which covers the North American–wide industry. These numbers are extremely useful as an investor.
As is typically the case in new bull markets, transportation stocks surge, which they did. Railroad stocks, especially Union Pacific, accelerated tremendously at the beginning of 2013 (when I believe the current bull market began).
The position moved strongly higher, right up until the beginning of 2015. Then, along with the continuing decline in coals shipments among other freight, the position retrenched.
Union Pacific’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
But this doesn’t mean that the story is over. Transportation stocks live and breath off oil prices (best example: airlines).
As we know, the prices of gasoline, diesel, and jet fuel are down (not necessarily the surcharges to customers, though!). This means that it’s much easier for a railroad company to keep shareholders happy, even when freight volumes decline.
Look, rail freight is a cyclical business. But it’s also a profitable one and Union Pacific, which currently yields just less than three percent, is not expensively priced on the stock market.
Fourth-quarter 2015 freight volumes (or revenue carloads) for Union Pacific stock declined nine percent comparatively, producing a 15% decline in total quarterly operating revenues to $5.2 billion.
The company’s quarterly average diesel fuel price in the fourth quarter was $1.61 per gallon, or 39% lower than the fourth quarter of 2014.
Once again, Union Pacific’s biggest freight revenue decline was in coal shipments.
The Bottom Line on Union Pacific Stock
Union Pacific has a great track record in increasing dividend payments to stockholders. In the fourth quarter of 2015, the company repurchased 6.6 million of its own common shares for $586 million.
But it’s useful to consider that the stock market is a forward-looking pricing mechanism and Merrill Lynch sees many of the transportation stocks, including Union Pacific, as attractive now that they’ve corrected. UNP stock is due for some near-term upside.
This position is not expensively priced with an attractive yield.
What’s important with Union Pacific stock is to keep it on your radar. Railroad companies like Union Pacific are like canaries in a coalmine; rail freight data over the next quarter or two will reveal whether or not the U.S. economy will soon experience a recession.