If global growth was really dead, then why would Union Pacific (UNP) and CSX (CSX) both raise forward guidance amidst a slowing economy, unclear political climate and weakening demand?

It's simple: Because the railroad business is booming, and these stocks are undervalued

Last week, CSX lifted its annual earnings guidance to $3.65 to $3.75 a share from $3.40 to $3.60 a share. CSX also lifted its capital spending in the year to $1.75 billion and free cash flow before the dividend to $1 billion. CSX trades with a forward P/E of 12.90, PEG ratio of 0.87 and EV/EBITDA of 8.697

On Monday, Union Pacific raised its third-quarter earnings estimates, saying lower diesel-fuel costs and strong operating efficiency will offset lower volumes and the impact of recent hurricanes. Union Pacific said it expects earnings of $1.28 to $1.33 a share, up from $1.10 to $1.20 a share. Union Pacific trades with a forward P/E of 14.29, PEG ratio of 0.89 and EV/EBITDA of 9.703

Both CSX and Union Pacific cited additional demand for railroad cars in the near future.

The plays here are American Railcar (ARII), of which Carl Icahn is the largest shareholder, and FreightCar America (RAIL). These are both solid companies that stand to benefit from CSX’s and Union Pacific’s recent demands. American Railcar trades with a forward P/E of 14.05, PEG ratio of 0.40 and EV/EBITDA of 5.252. FreightCar America trades with EV/EBITDA of 14.183

Also worth watching is Canadian National Railway (CNI), which is viewed by many as the world’s leading railroad. Canadian National Railway has gross margins north of 48%, the highest in the group, with an industry average of 30.09%. Operating margins are 35.84%, also the highest in group, with an industry average of 14.06%.

All aboard these rail stocks!

Posted on Sept. 24, 2008