After months of market uncertainty surrounding the trade war being waged by the Trump administration, major railroad stocks received a boost as a result of the recent deal reached by the U.S. and Mexico. While negotiations with the Canadian government are still in progress, several of these companies present appealing investment opportunities because they have strong business predictability ratings, are posting consistent earnings and revenue growth and are trading below their Peter Lynch values.
Lynch, an investing legend, developed this method in order to simplify his stock-picking process. With the belief that good, stable companies eventually trade at 15 times their annual earnings, he compared the price of a company’s stock over time to its earnings, setting the standard at a price-earnings ratio of 15. Stocks that trade below this level are often good investments as their share prices are likely to appreciate over time, thereby creating value for shareholders.
Three railroad stocks that currently meet Lynch’s criteria are Genessee & Wyoming Inc. (GWR, Financial), Kansas City Southern (KSU, Financial) and Union Pacific Corp. (UNP, Financial).
Genessee & Wyoming
The Darien, Connecticut-based company, which owns and leases short line railroads, has a market cap of $5.32 billion; its shares were trading around $88.49 on Monday with a price-earnings ratio of 9.27, a price-book ratio of 1.52 and a price-sales ratio of 2.37.
The Peter Lynch chart shows the stock is trading well below its fair value, suggesting it is undervalued.
Genessee & Wyoming’s financial strength was rated 5 out of 10 by GuruFocus as it has poor interest coverage. In addition, the Altman Z-Score of 1.67 indicates the company is under some fiscal pressure.
The railroad owner’s profitability and growth scored an 8 out of 10 rating. While its margins have declined in recent years, they still outperform competitors. The Piotroski F-Score of 6 implies business conditions are stable. The company has a business predictability rank of three out of five stars. According to GuruFocus, companies with this rank typically see their stock prices gain an average of 8.2% per year. They also have consistent earnings and revenue growth.
Of the gurus invested in Genessee & Wyoming, Manning & Napier Advisors has the largest position with 2% of outstanding shares. Steven Cohen (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) are also shareholders.
Kansas City Southern
Headquartered in Kansas City, Missouri, the company, which operates the smallest and third-oldest Class I railroad in the U.S., has a $12.12 billion market cap; its shares were trading around $118.65 on Monday with a price-earnings ratio of 12.67, a price-book ratio of 2.59 and a price-sales ratio of 4.65.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated Kansas City Southern’s financial strength 5 out of 10. Although the company has issued $556.1 million in new long-term debt over the last three years, it is still at a manageable level. The Altman Z-Score of 2.89, however, indicates the company is experiencing some minor fiduciary stress.
The railroad’s profitability and growth fared much better, scoring a 9 out of 10 rating. The company is supported by an expanding operating margin, which outperforms 91% of industry peers, and a strong Piotroski F-Score of 7. The company also has a perfect five-star business predictability rank. On top of having good revenue and earnings growth, GuruFocus says companies with this coveted rank typically see their stock prices gain an average of 12.1% per year.
With 1.89% of outstanding shares, Pioneer Investments (Trades, Portfolio) is the company’s largest guru shareholder. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Fisher (Trades, Portfolio), Manning & Napier, Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Hussman (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also own the stock.
Union Pacific
The well-known railroad company, which is based in Omaha, Nebraska, has a market cap of $115.49 billion; its shares were trading around $156.17 on Monday with a price-earnings ratio of 10.96, a price-book ratio of 5.80 and a price-sales ratio of 5.55.
Based on the Peter Lynch chart, the stock appears to be undervalued.
Union Pacific’s financial strength was rated 5 out of 10 by GuruFocus. Despite issuing approximately $9.4 billion in new long-term debt over the last three years, it is at a manageable level because the company has sufficient interest coverage. Additionally, the Altman Z-Score of 3.66 indicates the company is financially stable.
Supported by an expanding operating margin, the company’s profitability and growth scored an 8 out of 10 rating. The railroad also has a moderate Piotroski F-Score of 6 and a three-star business predictability rank as its earnings and revenue growth has been steady.
Dodge & Cox is the company’s largest guru shareholder with 1.37% of outstanding shares. Other top guru shareholders include First Eagle Investment (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Pioneer, Tweedy Browne (Trades, Portfolio), Cohen, Fisher, Manning & Napier, Greenblatt and Frank Sands (Trades, Portfolio).
Disclosure: No positions.
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