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MARKET BUZZ

Railroads' Solid Track Record

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Sunday, August 10, 2008

If life were a big Monopoly game and you landed on the railroads, would you buy? You'd have to think, "Hmm, transportation stocks?" Look what's happened to the airlines and truckers.

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But railroads are on a different track altogether. David Greene, a vice president at CJM Wealth Advisers in Fairfax, noticed several weeks ago that the only standouts in the Dow Jones Transportation Index were the railroads. CSX, for instance, was up 54.5 percent this year through July, Norfolk Southern gained 45.8 percent, and Union Pacific rose 31.7 percent. The strong performances have continued for at least five years. "I wanted to know why," he said recently.

His answer revealed a small anomaly in the U.S. economic and market slump. Typically, transportation stocks deflate along with the economy, but in this era, the railroads have forked off from the airlines and truckers because of the run-up in oil prices and efficiencies put in place over many years. Technology, improved management and the elimination of lots of track requiring high-cost maintenance all have helped contribute to what has been called a railroad renaissance. The railroads also have diversified what they haul and have streamlined the handling of cargo.

The improvements are aiding the railroads while truckers and air cargo companies are struggling under crushing fuel costs. The railroads also have been able to boost prices and increase margins. They are able to hit customers with surcharges to soften their fuel costs; smaller truckers don't have such leverage. "Railroads may be able to not only take over market share of hauling but keep it," Greene predicted.

Possible downsides include a prolonged drop in oil prices, allowing truckers and airlines to fight back. Greene noted that the volume of hauling is in fact down this year. If the economy falls into an extended slump, the need to move freight could drop off significantly, causing the railroads to lose some steam. That might not be so bad, however: After their years' long run-up, the railroads are a little pricey, and a modest reversal would improve their value.

-- Steven E. Levingston


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