With rising demand for sustainable and cost-effective transportation, a surge in cross-border trades, and numerous technological advancements, the railroad industry is well-poised to experience significant profitability and expansion in the long run.
Hence, investing in fundamentally sound railroad stocks West Japan Railway Company (WJRYY), Westinghouse Air Brake Technologies Corporation (WAB), and L.B. Foster Company (FSTR) could be wise for potential gains this year.
Rail transit is preferred compared to other modes of transportation as it is an ecological and energy-efficient logistics solution. Other factors that play a vital role in the railroad sector’s growth are low transportation cost of freight, rise in cross-border trades, and growing demand for freight rail networks.
The North America rail freight transportation market is expected to grow at a CAGR of 7.5% during the forecast period (2023-2028). The market size is projected to increase by $35.83 billion.
Meanwhile, in 2024, the gross revenue of the global railroad market is anticipated to be valued at $311.63 billion. In addition, the railroad investment might grow at a CAGR of 5% from 2024 to 2034, reaching $507.61 billion by 2034.
Digital technology has further upgraded the railroad sector by making reservation processes easier and enhancing the passenger’ experience. Industry players are increasingly adopting advanced technologies, including Artificial Intelligence (AI), the Internet of Things (IoT), big data, automation, machine learning, and blockchain.
Recent technological advancements include automatic train control systems to reduce technical errors and enhance traffic flows, IoT to enable condition-based monitoring, and AI to improve traffic planning, control, and optimization of railroad operations. In addition, 5G technology will be a crucial catalyst for the industry’s transformation.
The global smart railways market is projected to reach a value of $75.75 billion by 2032, growing at a CAGR of 11.2% between 2024 and 2032.
In light of these encouraging trends, let’s look at the fundamentals of the three best Railroads stocks, beginning with number 3.
Stock #3: West Japan Railway Company (WJRYY)
Headquartered in Osaka, Japan, WJRYY offers railway transport services. It operates through Mobility; Retail; Real Estate; Travel and Regional Solutions; and Other segments. It provides passenger transportation, station operation and management, equipment installation, food and other wholesale operation services, and sells and leases real estate properties.
WJRYY’s trailing-12-month EBIT margin and EBITDA margin of 10.21% and 20.64% are 4.1% and 50.5% higher than the respective industry averages of 9.81% and 13.72%. Likewise, the stock’s trailing-12-month CAPEX/Sales of 0.42x is significantly higher than the industry average of 2.97%.
For the first half of fiscal 2024 ended September 30, 2023, WJRYY’s operating revenue increased 24.8% year-over-year to ¥769.90 billion ($5.43 billion). Its operating income grew 214% year-over-year to ¥106.29 billion ($749.99 million). The company’s recurring profit came in at ¥98.46 billion ($694.72 million), up 255.4% from the prior year’s period.
In addition, profit attributable to owners of parents increased 4.1% from the year-ago value to ¥64.52 billion ($455.25 million).
Analysts expect WJRYY’s revenue for the fiscal year (ending March 2024) to increase 5.8% year-over-year to $6.14 billion. Similarly, the company’s revenue for the fiscal year 2025 is expected to grow 5.1% year-over-year to $6.45 billion. Moreover, WJRYY surpassed the consensus revenue estimates in three of the trailing four quarters.
WJRYY’s stock gained 3.4% over the past month to close the last trading session at $41.28.
WJRYY’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Growth and a B for Stability. WJRYY is ranked #4 of 15 stocks within the B-rated Railroads industry.
To see additional POWR Ratings of WJRYY for Value, Sentiment, Quality, and Momentum, click here.
Stock #2: Westinghouse Air Brake Technologies Corporation (WAB)
WAB provides tech-based locomotives, equipment, systems, and services for freight rail and passenger transit industries. It operates in two segments: Freight and Transit. The Freight segment manufactures and services components for freight cars and locomotives. The Transit segment offers components for new and existing passenger transit vehicles.
On December 14, 2023, WAB announced its entrance into the railcar telematics market with a new railcar telematics platform. The company had entered into an agreement with Intermodal Telematics B.V., a Dutch company, under which Wabtec will create a railcar telematics platform using IMT technology.
Wabtec’s new railcar telematics platform will deliver real-time information to railcar and tank container owners and operators, enabling them to turn rail cargo into smart, connected assets.
On November 28, WAB and Marinsa International, its Latin American Channel partner, signed a contract to supply the primary power for ten new hybrid tractor tugboats with Panama Canal Authority (ACP). As per the contract, Wabtec will deliver two 8L250MDA marine engines for each tugboat.
“Wabtec is delighted to power the new hybrid Panama Canal tugs with the 8L250MDA marine engines. We are honored, through our partnership with Marinsa, to continue serving this important customer and the critical role they provide in facilitating world trade,” said Tammy Gromacki, Wabtec’s Vice President of Marine, Stationary and Drill.
WAB’s trailing-12-month EBIT margin of 13.49% is 37.5% higher than the industry average of 9.81%. Likewise, the stock’s trailing-12-month net income margin of 8.02% is 31.1% higher than the industry average of 6.12%.
For the third quarter that ended September 30, WAB’s net sales increased 22.5% year-over-year to $2.55 billion. The company’s gross profit and income from operations came in at $792 million and $370 million, up 22.2% and 41.7% from the prior year’s quarter, respectively.
In addition, the company’s net income grew 48.5% year-over-year to $242 million. Its adjusted EPS increased 39.3% from the year-ago value to $1.70.
As per the updated financial guidance for the fiscal year 2023, WAB expects its sales to be in a range of $9.50 billion to $9.70 billion and its adjusted earnings per share to be between $5.80 - $6.00.
Street expects WAB’s revenue for the fourth quarter (ended December 2023) to increase 7.6% year-over-year to $2.48 billion. The company’s EPS for the same period is expected to grow 21.3% year-over-year to $1.58. Also, it has surpassed consensus revenue estimates and EPS estimates in each of the trailing four quarters.
Over the past six months, WAB’s stock has gained 15.1% and 26.2% over the past year to close the last trading session at $125.89.
WAB’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has a B grade for Growth, Sentiment, and Quality. Within the B-rated Railroads industry, WAB is ranked #2 of 15 stocks.
Click here to access additional ratings of WAB for Stability, Value, and Momentum.
Stock #1: L.B. Foster Company (FSTR)
FSTR offers engineered and manufactured products and services for building and infrastructure projects globally. It operates through three segments: Rail; Technologies; and Services. It provides new rails to passenger and short-line freight railroads, industrial companies, and rail contractors; used rails; and rail accessories, like track spikes and anchors.
On September 26, 2023, FSTR announced the expansion of its strategic partnership with FUCHS Lubricants Co., the world's largest independent lubricant manufacturer, to encircle additional rail markets in South America, Australia, and China.
This collaboration brings together the strengths of L.B. Foster’s expertise in wheel/rail engineering and FUCHS’s process in lubricant manufacturing, delivering industry-leading solutions to enhance the global rail sector.
FSTR’s trailing-12-month levered FCF margin of 6.77% is 13.2% higher than theindustry average of 5.98%. Also, the stock’s trailing-12-month asset turnover ratio of 1.46x is 82.5% higher than the industry average of 0.80x.
In the third quarter that ended September 30, 2023, FSTR’s net sales grew 11.8% year-over-year to $145.34 million. Its gross profit rose 22.2% from the year-ago value to $28.22 million. The company’s adjusted EBITDA increased 14.2% from the prior year’s quarter to $10.59 million.
Furthermore, the company’s net income and earnings per common share came in at $447 thousand and $0.05, against a net loss and loss per share of $2.11 million and $0.20 in the prior year’s period, respectively.
Street expects FSTR’s revenue for the fiscal year (ended December 2023) to increase 7.8% year-over-year to $536.52 million. Likewise, for the fiscal year 2024, its revenue is expected to grow 6.9% year-over-year to $573.34 million. Further, the company has surpassed the consensus revenue estimates in each of the trailing four quarters.
Shares of FSTR have gained 56.6% over the past six months and 127.7% over the past year to close the last trading session at $22.29.
FSTR’s POWR Ratings reflect its bright prospects. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
FSTR has a B grade for Growth and Quality. It is ranked first among 15 stocks in the B-rated Railroads industry.
Click here to access additional FSTR ratings for Value, Stability, Sentiment, and Momentum.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
WAB shares were unchanged in premarket trading Wednesday. Year-to-date, WAB has declined -0.80%, versus a -0.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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