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Where Is the Growth in Transportation?

Monday - 3/4/2013, 3:56pm  ET

Warren Buffett's recent purchase of Burlington Northern Santa Fe shoved the rail industry into the spotlight, but trucks still serve an important function. It is true that trains and water are more efficient than trucks. Still, truckers benefit from a huge road network that they are not forced to maintain. Some trucking firms are strong companies, even if they do not offer the efficiencies of rail or water. 

CGI Operating Margin TTM data by YCharts

A Trucker with Challenges

Celadon Group  operates in the United States, Canada, and Mexico. Their focus on long haul routes exposes them to greater competition with railroads. In order to be successful, profitable trucking firms will need to learn to work with more efficient means of transportation and not against them. Trucks offer greater flexibility in places where there are no railways or waterways.

Celadon Group has one of the youngest fleets with an average tractor age of 1.6 years as of March, 2012. Even though the firm is not in the best place, their young fleet will help to ward off high fuel costs.

Celadon's total debt to equity ratio of 1.11 and current profit margin of 4.9% are concerning. Their debt load and low margins coupled with the shift of long haul traffic to railroads make this trucker one firm best left on the sidelines.

Where Trucks Shine, the Short and Medium Haul

Knight Transportation focuses on medium and short haul routes. In general the past couple years have been very challenging. Between fuel price increases and the great recession, the trucking industry has seen a decrease in fleet size. Many small truckers were unable to survive the collapse in demand and subsequently entered bankruptcy. This trend ended up strengthening larger firms like Knight that have the capital and resources to survive a downturn. 

Knight's balance sheet is clean with a total debt to equity ratio of just 0.09. Its profit margin of 6.9% is stronger than Celadon's, although it is significantly less than the major railroads' profit margin.

Knight trades at a P/E ratio of 19.7. This is expensive as railroads with stronger barriers to entry can be purchased at more conservative valuations. Knight is growing and wisely focuses on short and medium haul, but currently it is too expensive. 

Where Rail Shines, the Long Haul

Any investigation of the trucking industry needs to consider the actions of the railroads. Union Pacific  is one of the largest railroads in the U.S. The changing nature of America's transportation network can be seen in the railroad's growth of intermodal traffic. Intermodal facilities are used to transport goods between different methods of transportation. Relative to 2011, 2012 intermodal volumes increased 2% and revenue increased 6%. 

For long term investors railroads need to be evaluated with a grain of salt. Large amounts of crude oil are being transported by train due to lack of pipeline capacity. As soon as more pipelines are constructed, oil will leave railroads for lower cost pipelines. Union's Pacific total debt to equity ratio of 0.45 is reasonable. A future decrease in crude volumes will negatively impact the firm, but it will not be fatal.

With increasing fuel costs and the desire for more efficient means of transpiration, Union Pacific has been a strong firm. Its operating margin has steadily increased over the past couple years and it has a profit margin of 18.8%. By updating their equipment, it has been able to increase efficiencies and provide more gains for shareholders. Union Pacific a strong player with large moats and a very profitable operation. 

Conclusion

Trains are always in the news, but there are a few strong truckers like Knight that are good companies. Currently Knight is rather expensive as it currently trades close to 20 times annual earnings. Until it comes down in price, railroads like Union Pacific are better investments. 

This article was originally published as Where Is the Growth in Transportation?on Fool.com

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