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Get Working on the Railroad Stocks

NEW YORK ( TheStreet) -- Children of all ages love to watch railroad trains. There are societies and clubs that know more about locomotives, railroad cars and cabooses then most of us care to hear. It's a form of transportation that won't be going away.

The point we investors need to remember is the economies of the world need rail-based transportation services to economically move all kinds of goods and supplies in a more environmentally-responsible way.

One of the publicly traded railroads is CSX (CSX - Get Report) which has been having a relatively flat to increasingly profitable year, and will be releasing its latest quarterly report after the market close Tuesday.

CSX, with its subsidiaries, provides rail-based transportation services. It offers traditional rail service and the transport of intermodal containers and trailers. The company transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, automotive, paper, other wood products and chemicals.

It also uses the rails to ship various grades of coal to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities. This is the part of its business that will be replaced, we hope, as the power-generating business shifts more to natural gas and liquid natural gas and away from the burning of polluting coal.

CSX provides intermodal (containers and trailers) transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States, as well as performs drayage services and trucking dispatch operations.

In addition, the company operates various distribution centers and storage locations and connects non-rail served customers to the benefits of rail through transferring products (such as ethanol and minerals) from rail to trucks. If you're not yet impressed, CSX is involved in real estate acquisition, development, sales, leasing, and management activities.

It operates an approximately 21,000 route-mile rail network, which serves multiple population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec, as well as operates approximately 4,000 locomotives. The company also serves production and distribution facilities through its numerous track connections.

No wonder in the trailing 12 months the company generated close to $12 billion in revenue. The profit margin and operating margin are at very respectable levels of 16% and almost 30% respectively. If you're into owning stocks that pay dividends, CSX's 2.6% dividend represent a payout ratio of just 28% of their earnings.



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Now let's consider its share price during the last 12 months. It has obviously corrected, and when you add in the company's earnings yield you may surmise that there's upside potential for the share price, as the chart below indicates. CSX Chart CSX data by YCharts

As mentioned earlier, CSX reports quarterly earnings today, and when it comes to earnings-per-share and revenue growth, let's hope it will be better than last quarter. With over $9 billion in total debt, CSX could stand some improvement with its balance sheet and cash flow statement. Total cash, operating cash flow and levered free cash flow will be line items worth focusing on.

The competition for CSX in its operating regions is none other than Norfolk Southern (NSC), which, like CSX, gets a meaningful amount from transporting coal. That factor is one of the reasons NSC lowered its earnings guidance in September, triggering a sell-off of most of the railroad stocks.

Tuesday's earnings report by CSX will indicate if the correction in the railroad stocks was overblown. NSC steps into the earning confessional one week later on Oct. 23.

One positive area for potential growth for both CSX and NSC is the intermodal shipping segment. Suppliers, manufacturers and even retailers are finding that using intermodal containers and placing them aboard railroad flat cars can reduce shipping costs substantially.

If the news Tuesday about the September industrial output is better than expected and the housing market numbers from the National Association of Home Builders show improvement, we might begin to see a rally in the transportation stocks like CSX and NSC.

If CSX disappoints and lowers guidance don't be surprised if at first you see a decline that may test its 52-week low of $19.87. On the other hand if it beats expectations and gives any kind of bullish guidance, the shares of all the major railroad stocks may rally.

"Can't you hear the whistle blowing? Rise up so early in the morning. Can't you hear the captain shouting, 'Dinah blow your horn'?"

Can't you tell that I have railroad fever, and if the economy starts to percolate under the gushing forth of he Federal Reserve's quantitative easing, I expect shareholders might be blowing their horns in celebration!



At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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