Union Pacific Corp. (NYSE:UNP) – attractive on P/E growth investing
The company's solid competitive position (operates the largest U.S. railroad with a network that spans about 32,200 miles and links Pacific Coast and Gulf Coast ports to midwestern and eastern gateways), moderate financial policies (current ratio of 1.2, and total debt-to-assets ratio of 33.41 percent at the end of 2010), and strong liquidity (cash of $1.08 billion at the end of 2010 and cash flow of $4.3 billion in 2010), make this an attractive investment.
Given rising freight volumes, strong operating efficiency, and stable pricing trends, I expect Union Pacific to maintain satisfactory operating profitability and maintain FFO-to -debt in the mid-30 percent area and total debt-to-capital in the mid-40 percent range. The yield-adjusted P/E/G ratio for UNP (.73), based on the average of the 3-, 4- and 5-year historical EPS growth rates, is attractive. The company's forward (2011/12) earnings growth of 17.88 percent could beat its industry's average growth of 6.52 percent.
In the last one year, the stock gained $3.11, or 3.89 percent, to close yesterday at $83.07. This compares with a 52-week range of $78.78 to $107.89. By the end of Q4, I expect the stock to test $110. Buying at current levels could lead to a profit-loss ratio of 1.4 to 1.
CSX Corp. (NYSE:CSX) – attractive on P/E growth investing
CSX Corp's strong competitive position (operates the largest rail network in the eastern U.S. with a 21,000-mile rail network linking commercial markets in 23 states and two Canadian provinces, and owns companies providing intermodal and rail-to-truck transload services), favorable characteristics of the North American freight railroad industry (include limited cyclicality, high barriers to entry), and access to low-cost equipment financing, make this an attractive investment. I believe CSX's improving volumes, strong operating leverage, and moderate pricing increases will result in satisfactory operating profitability and generate healthy cash flow, which I expect will result in FFO-to-total-debt in the 30 percent area in 2011.
CSX expects to make 2011 capital investments of $2.2 billion. That is consistent with its intentions to reinvest an average of 18 percent of its revenues into its business through 2015 to further enhance the capacity, quality and flexibility of its rail network. The company remains on target to achieve its current near- and long-term financial guidance, including a high-sixties operating ratio in 2011 and a 65 percent operating ratio by no later than 2015.
The yield-adjusted P/E/G ratio for CSX (.77), based on the average of the 3-, 4- and 5-year historical EPS growth rates, is attractive. The company's forward (2011/12) earnings growth of 27.21 percent could beat its industry's average growth of 13.5 percent.
In the last year, the stock gained $0.29, or 1.58 percent, to close yesterday at $18.59. This compares with a 52-week range of $17.98 to $27.06. By the end of Q4, I expect the stock to test $22.