Stock Watch
Burlington Northern Santa Fe: Catch the Train
Railroads may be old ecomony, but strong demand and pricing power are helping to make this U.S. operator one of the new growth stocks.
March 10, 2005
The railroad and trucking industries are booming. With businesses increasingly wanting to minimize inventories, goods are spending proportionally more time in motion than in warehouses. In turn, retailers and manufacturers are more dependent than ever on reliable transportation.
Although both truckers and railroads benefit from current trends, investors are better off riding the rails. The trucking industry is on the verge of adding a good deal of capacity and paying sharply higher wages to alleviate a driver shortage. Plus, trucking stocks have already had huge runs.
Railroad analysts say Burlington Northern Santa Fe (BNI) is among the best U.S. operators. It's coming off a spectacular year, with 2004 earnings up 37%. And it recently raised prices 3% to 5%, taking advantage of strong demand.
Burlington is benefiting from the seemingly endless lines of ships docking on the West Coast with Pacific Rim goods, many of which are loaded onto its container trains for inland destinations. Analysts reckon earnings could grow in the double digits per year for several years, or as long as coal mines, steel mills and chemical plants operate at full blast and seaports bustle with imports.
Burlington "continues to hit on all cylinders, realizing strong volumes and pricing," Bear Stearns analysts Thomas Wadewitz and Edward Wolfe said on Tuesday. They say Burlington should continue to turn tight capacity and strong demand into "impressive financial results."
At $53, Burlington trades at about 15 times the consensus 2005 earnings estimate of $3.41 per share. That's not rock-bottom for railroads, but with the company recently blowing past analysts' earnings estimates -- by a wide margin -- you can make a solid case for the stock deserving a higher price-earnings ratio and hence a higher price.
Wadewitz and Wolfe, for example, say that the stock should trade around $55 based on their 2006 earnings estimate. But they also say shares could push into high $50s, given the company's potential to post higher than expected earnings this year and next.
Burlington pays an annual dividend of 68 cents per share.
--Jeffrey Kosnett and Lisa Dixon