Home>Video>Morningstar Minute: Rails Are Just the Ticket for Wide Moats

Morningstar Minute: Rails Are Just the Ticket for Wide Moats

Tue, 11 Mar 2014

Class I railroads have cost advantages and scale efficiencies that give them a competitive edge over lesser players.


Video Transcript

Keith Schoonmaker: At Morningstar, we attribute wide moats to the Class I rails due to cost advantage and efficient scale. Let's look at some individual railroads.

First CSX. CSX is cheapest by our valuation methodology, we think because of the market concerns about its exposure to central Appalachian coal. We share this concern and have projected decreasing volumes in our valuation model.

CSX's neighbor in the east is Norfolk Southern. It has the same coal concerns but it bears a little bit higher dividend yield at about 2.2% relative to CSX's 2.1% at this time.

For overall quality of portfolio it's hard not to like Union Pacific. Union Pacific is the giant railroad in the West with high exposure to coal, but also to intermodal shipping coming from Los Angeles-Long Beach to Chicago. [The firm has] a big exposure to Mexico, as well, with about 10% of its revenue derived from traffic in and out of Mexico.

Kansas City Southern shares are a bit cheaper than they were earlier this year because of the market concerns about slowing growth due to some delays in bringing new automotive plants on line in Mexico. Also, a recent bill passed in the Mexican lower house, which brings some concerns about the longevity of the franchise in Mexico, through which Kansas City Southern earns about 46% of its revenue. In response to this, we increased our fair value uncertainty rating but feel that we lack sufficient information at this time to make discrete projections in our valuation model. So we're leaving our fair value estimate unchanged at this time.

It's hard to ignore the progress that CP has made recently, just in the past year and a half driving down its operating ratio tremendously. Morningstar in fact awarded the 2013 CEO of the Year award to the CP CEO, Hunter Harrison, for his efforts made here and just the tremendous improvement made in the operations at this northern railroad.

Railroads are really operating at their peak compared with probably all-time history. Valuation reflects this however, so we would encourage investors to take a look at railroads, especially when there is some pullback in the current share prices.

  1. Related Videos
  2. Related Articles
  1. 2 Wide-Moat Railroads for Your Radar

    Morningstar's Matt Coffina and Keith Schoonmaker discuss why companies in this sector have wide moats and which are the best railroads for long-term investors.

  2. Union Pacific : A Good Bet for the Long Haul

    Coal headwinds should only be temporary for wide-moat Union Pacific , which gives it an advantage over other rail companies, says Morningstar's Matt Coffina.

  3. 13 New Stocks Join the Wide Moat Focus Index

    Out-of-favor media and railroad names replaced several energy equities in Morningstar's index of most-undervalued wide-moat stocks, says Morningstar's Matt Coffina.

  4. Bond Market 'Extremely Complacent' About Inflation

    Templeton Global Macro Group's Sonal Desai sees a confluence of factors that could push prices higher than markets are currently expecting.

  5. The Friday Five

    Five stats from the market and the stories behind them. This week: three wide-moat names worth a look, an 89-day deal in Washington, and more.

  6. Smarter International Investing

    Morningstar's Patty Oey and Dan Rohr and Columbia Acorn's Andreas Waldburg-Wolfegg offer best practices for globe-trotting investors who must navigate choppy waters in today's market.

  7. Cash-Gushing Union Pacific Looks Undervalued

    While most rails are fairly valued today, Union Pacific is trading at a discount, and it is poised to benefit from an intermodal recovery.

  8. Wide Moat Focus Index Unfriends Facebook

    It's all aboard for CSX , among others, in the index's quarterly rebalancing.

©2017 Morningstar Advisor. All right reserved.