When Warren Buffett starts investing billions of dollars into a sector, you can bet it’s an industry on the rise. Buffett’s Berkshire Hathaway bought Burlington Northern Santa Fe for $26.5 billion last year. The company helped Berkshire’s profit jump 43 percent in the fourth quarter.
Burlington Northern isn’t the only railroad humming down the track. Norfolk Southern (NSC), the country’s fourth-largest railroad, and Union Pacific (UNP), the nation’s biggest, are seeing strong business too. So it’s a good time to consider their stocks.
Norfolk Southern saw its profit surge 31 percent in the fourth quarter to $402 million from $307 million a year earlier, topping analysts’ estimates. Revenue rose 14 percent to $2.39 billion.
All three of the company’s business divisions recorded double-digit revenue increases amid strong demand from industrial customers. And Norfolk Southern expects the good times to continue rolling. "We have every reason to believe that 2011 will be an even stronger year for us" than 2010, CEO Wick Moorman said in a statement.
Many analysts like the stock, noting that the company has generated a free cash flow of about $1 billion during five of the past six years. “Medium-term trends in NSC's primary markets remain favorable and support rising traffic,” writes Standard & Poor’s analyst Kevin Kirkeby, who has a four-star buy rating on the stock.
The company reported record first-quarter net income of $639 million, up 24 percent from $516 million a year earlier. Sales rose 13 percent to $4.49 billion, exceeding analysts’ estimates.
Even rising oil prices couldn’t keep Union Pacific’s profit down. Increased volume for all the commodities carried by the company buoyed its business. And Union Pacific expects volume to keep climbing, as the economy sustains its recovery. Meanwhile, the company can impose fuel surcharges to make up for its own higher energy costs.
"So far we haven't heard anything that puts the rail volume, pricing, or margin (ex-fuel) thesis at risk," Jefferies & Co. analysts write. Of seven analysts tracked by Yahoo, five have buy or equivalent ratings, and the other two are neutral.
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