Is it time to ride the rails? In Gordon Pape's The Internet Wealth Builder, analyst Tom Slee reaffirms his buy rating on Burlington Northern Santa Fe (NYSE: BNI), his top pick in the sector.
"Burlington Northern is my preferred choice in the railroad industry. At first glance, Burlington Northern had a particularly bad first quarter.
"Profit was $0.86 a share, down sharply from $1.30 a share the year before. However, when unusual items such as an unfavourable coal rate decision are excluded, operating earnings amounted to a much more acceptable $1.13 a share, well above the 96c analysts were looking for.
"Lower fuel costs and a reduction in payroll expenses partially offset an 18% drop in revenues. The operating ratio improved slightly to 78.3%.
"The slow economy is taking its toll. Coal shipments continue to soften and this is going to hurt second-quarter numbers that are usually helped by a seasonal lift.
"On the other hand, analysts expect U.S. freight rates to rise during the next 12 months as contracts are renewed and reflect higher surcharges.
"Another plus is that while auto and construction volumes are bound to remain low in 2009, the longer term outlook for coal, grain, and chemicals traffic remains positive.
"BNI is performing better during the downturn than many analysts expected and is well positioned to generate above-average revenue and earnings growth once the recovery gets underway. Its exposure to the long-haul coal, grain, and intermodal markets should pay off.
"All things considered, we could see earnings of about $5.60 a share in 2009, a decline from $6.33 a share last year, followed by a rebound to the $7 range in 2010.
"At the current price, the stock is not reflecting even this relatively cautious outlook. Burlington Northern Santa Fe remains a buy with a target of $85."
Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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