| April 21
April 21 U.S. railroads are obvious winners from
the latest delay in the Keystone XL Pipeline approval, and some
of the freight operators with the biggest growth in petroleum
shipments look undervalued, according to an analysis of Thomson
While shares in some railroad companies have recently hit
record highs, there may be still more upside potential. CSX Corp
and Norfolk Southern Corp are both trading 15
percent or more below their warranted share price, according to
a measure of "intrinsic valuation" tracked by Thomson Reuters
The Obama administration's decision to extend indefinitely
the review process for the controversial oil pipeline connecting
Canada with the U.S. Gulf Coast effectively cements the view
that U.S. freight rail haulers are here to stay as big players
in the oil-shipping business.
"Users have realized rail is a great diversification in
terms of delivery of crude to the refineries, regardless of
whether Keystone goes ahead or not," said Walter Spracklin,
equity research analyst at RBC Capital Markets in Toronto. "If
Keystone doesn't go ahead, it hammers home the point."
Petroleum product volumes by freight rail rose by more than
28 percent in 2013 to 1.54 million carloads, according to data
from Cowen & Co and RailShare, and oil-by-rail is by far the
freight rail industry's fastest-growing segment. So far this
year, traffic is running 10 percent ahead of last year at this
The biggest player in the sector is Burlington Northern
Santa Fe, a unit of Warren Buffett's insurance and industrial
conglomerate Berkshire Hathaway Inc , which
accounts for roughly a third of U.S. oil-by-rail traffic.
It is followed by Union Pacific Corp, Norfolk
Southern, CSX and Kansas City Southern.
Union Pacific shares on Monday hit an all-time high, gaining
1 percent to close at $191.54, while Berkshire's A shares
touched their record last Thursday: $191,506. But both are
trading near their full valuations, according to intrinsic
valuation tracked by Thomson Reuters StarMine.
StarMine calculates a stock's intrinsic value using profit
growth estimates from the most accurate analysts tracking the
By that measure, the two freight haulers with the largest
year-to-date gains in oil-by-rail volumes, CSX and Norfolk
Southern, are both trading 15 percent or more below their
warranted share price.
Both saw their crude-related volume rise more than 50
percent last year, to about 2 percent of the overall volume each
moved. So far this year, CSX's petroleum product volume is up by
59 percent and Norfolk Southern's is up by 27.5 percent.
On Monday, CSX shares closed at $28.18, but StarMine pegs
their intrinsic value at $33.32, representing an upside of
around 18 percent. For Norfolk Southern, which ended the day at
$96.89, the intrinsic value model price is $115.
Meanwhile BNSF's crude-related volume, which rose 42.6
percent in 2013 to account for 5 percent of its total carloads,
is up by just 10.7 percent this year.
To be sure, the valuation picture for Berkshire is more
nuanced than its rail industry rivals given that BNSF accounted
for just 12 percent of the conglomerate's revenue in 2013 but
more than 20 percent of Berkshire's pretax profit.
Still, it is growing fast enough to have justify plans for
Berkshire to buy up to 5,000 new tanker cars rather than lease
them as is typically done by rail operators.
"Keystone shows new pipelines are difficult to get
approved," RBC's Spracklin said. "Crude by rail is not
difficult. It's a very flexible service."
(Reporting by Rodrigo Campos and Dan Burns; Editing by Lisa