Tickers in this Article: CSX, NSC, BNI, UNP, CNI
CSX Corporation (NYSE:CSX) came in on October 13 with dampened third-quarter earnings, but expressed cautious optimism that the worst was over for both the company and the economy. As a leading railroad, CSX, along with its large competitors, have often been considered part of the economy's bellwethers, as transport stocks provide a window into the industrial, agricultural and energy segments of our economy, with the shipping of everything from raw materials to finished goods.

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Stemming the Tide of Decline
CSX's revenues were down 23% for the year over year comparable quarters, at $2.3 billion, down from $2.96 billion. Freight volumes were off by 15% while operating revenues were $598 million. Its net income was $293 million, or 74 cents a share, versus $380 million, or 93 cents per share in last year's same quarter. The company beat its profit estimates while coming in slightly below its forecasted revenue numbers.

Coal hauling and automobile volumes were both down substantially, 18% and 28% respectively, and the company expects coal volumes to remain weak in 2010. Still, despite those factors, the company did post significant profits, albeit down from last year, and CEO Michael J. Ward pointed to the slowing of the decline in volumes as a sign that "the worst of the recession is likely behind us."

Ward had expressed caution, however, back in September in comments that the recovery for the rail industry would take several quarters.

Other Rails on the Same Track?
The other major railroads ride the same cyclical tracks of the economy, so CSX's competitors have felt the same economic friction. But as CSX pointed out, it has been cutting costs and tightening its operations during this recession, as have the other rails. A Forbes piece on Union Pacific (NYSE:UNP) CEO James Young, pointed out that Young has been re-fashioning Union Pacific for years under his helm, and continues to improve operations.

Burlington Northern-Santa Fe (NYSE:BNI) was cited in a Citi note in September for its "impressive" cost cuts. This doesn't mean that railroads aren't spending for improvements, as Canadian National Railway (NYSE:CNI), which operates in the American midwest as well as its native Canada, recently invested $100 million in reconstructing an important railyard in Memphis, so judicious capital expenditures continue.

And Norfolk Southern (NYSE:NSC), despite the tough economy, remains a darling of investors in the group, as its solid dividend and excellent three-to-five year prospects were cited.

What About CSX Stock?
CSX stock is currently trading near its 52-week high of $48.85 at $46.50, at a P/E of 16.9. Wall Street may be reading the rail trends a bit too exuberantly right now. As the company's forecasts indicate, though the worst may be over, earnings growth will likely be slow for several quarters, so you may want to watch for a lower price point to enter the stock. Value investors should note Norfolk Southern has a more favorable entry price right now. Long-term, railroads are a potentially strong growth group, as famed investor Warren Buffett has maintained with his increasing stakes in several of the companies.

The Bottom Line
The rails have powerful near-monopolies and are essential in moving nearly all types of goods across the country, so they are vital. The time horizon for rails as cyclical value investments is usually several years, but prudent buying and patient waiting for these stocks to come to fruition can be worthwhile. (To learn more, read The Ups And Downs Of Investing In Cyclical Stocks.)

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