The railroad industry is expected to grow significantly as a result of global demand for efficient transportation, technological advancements, and sustainable modes of transportation, owing to its cost-effective and environmentally friendly capabilities.
Given the industry’s growth prospects, investors could consider buying fundamentally sound railroad stocks, West Japan Railway Company (WJRYY), Westinghouse Air Brake Technologies Corporation (WAB) and L.B. Foster Company (FSTR) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the railroad industry.
In 2022, freight rail provided more than 95% of overall rail transportation revenues of $113 billion. Rail transportation, which is both reliable and cost-effective, leads to greater productivity, competitiveness, and growth for businesses that rely on it.
The growing demand for rail freight transport, which has a lower carbon footprint, cost-effective solutions for heavy goods, and the ability to reach remote areas, is likely driving the industry’s growth.
The global railroads market is supported by the growth of the global rail transport market, which is expected to grow at a CAGR of 5% and reach $507.61 billion by 2034.
Furthermore, the global smart railroads market is expected to reach $805.34 billion by 2033, with a steady 22.4% CAGR.
In light of these encouraging trends, let us dive into the fundamentals of these three best Railroads stocks, starting with the third choice.
Stock #3: West Japan Railway Company (WJRYY)
Based in Osaka, Japan, WJRYY provides railway transport services in Japan. The company operates through Mobility, Retail, Real Estate, Travel and Regional Solutions, and other segments.
WJRYY’s forward EV/EBITDA of 9.43x is 19.5% lower than the industry average of 11.72x.
WJRYY’s trailing-12-month EBITDA margin of 20.64% is 50.4% higher than the industry average of 13.73%. Its trailing-12-month CAPEX / Sales of 16.98% is 469.6% higher than the industry average of 2.98%.
WJRYY’s operating revenues for the six-month ended September 30, 2023, increased 24.8% year-over-year to ¥769.90 billion ($5.43 billion). The company’s profit came in at ¥67.14 billion ($473.37 million), up 4.1% year-over-year. Its operating income increased 167.3% year-over-year to ¥106.29 billion ($749.38 million), up 214% year-over-year. Also, its profit per share came in at ¥275.52, increased 4.1% from year ago period.
Analysts expect WJRYY’s revenue to increase 5.8% year-over-year to $6.14 billion for the year ending March 2024. Shares of WJRYY has gained 3.7% over the past month to close the last trading session at $41.03.
WJRYY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Stability. Within the B-rated Railroads industry, it is ranked #4 out of 15 stocks. To see WJRYY’s ratings for Value, Momentum, Sentiment and Quality, click here.
Stock #2: Westinghouse Air Brake Technologies Corporation (WAB)
WAB delivers technology-based locomotives, equipment, systems, and services to the freight rail and passenger transit industries. The company operates in two segments: Freight and Transit. Additionally, it provides services such as overhauling, modernizing, and refurbishing freight locomotives.
WAB’s forward non-GAAP PEG of 1.61x is 9.9% lower than the industry average of 1.79x. Its forward EV/EBIT of 16.33x is 1.6% lower than the industry average of 16.60x.
WAB’s trailing-12-month EBIT margin of 13.49% is 38.7% higher than the industry average of 9.73%. Its trailing-12-month net income margin of 8.02% is 31.7% higher than the industry average of 6.09%.
For the fiscal third quarter that ended September 30, 2023, WAB’s net sales increased 22.5% year-over-year to $2.55 billion. Its adjusted gross profit grew 23.3% from the year-ago value to $805 million. Also, the company’s adjusted net income and EPS rose 36.4% and 39.3% from the prior year’s period to $307 million and $1.70, respectively.
The consensus revenue came in at $9.59 billion for the fiscal year ending December 2023 represents a 14.7% increase year-over-year. Its EPS is expected to grow 22.8% year-over-year to $5.97 for the same year. It surpassed EPS estimates in all four trailing quarters. Shares of WAB has gained 29.1% over the past nine months to close the last trading session at $126.96.
WAB’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
WAB has a B grade for Growth, Sentiment and Quality. It ranks #2 in the same industry. Click here to access additional WAB ratings (Stability, Value and Momentum).
Stock #1: L.B. Foster Company (FSTR)
FSTR provides technologically advanced solutions, encompassing the engineering and manufacture of products and services vital for infrastructure development. The company operates through three segments: Rail, Technologies, and Services (Rail); Precast Concrete Products (Precast); and Steel Products and Measurement.
FSTR’s trailing-12-month EV/Sales of 0.61x is 66.8% lower than the industry average of 1.84x. Its trailing-12-month Price/Sales of 0.46x is 68.2% lower than the industry average of 1.45x.
FSTR’s trailing-12-month asset turnover ratio of 1.46x is 82.5% higher than the industry average of 0.80x. Its trailing-12-month levered FCF margin of 6.77% is 13.8% higher than the industry average of 5.95%.
FSTR’s total net sales rose 11.8% year-over-year to $145.35 million for the fiscal third quarter that ended September 30, 2023. Its adjusted EBITDA grew 14.2% from the year-ago value to $10.59 million.
Furthermore, the company’s net income and earnings per common share came in at $447 thousand and $0.05, compared to a net loss and loss per share of $2.11 million and $0.20, respectively.
Street expects FSTR’s revenue to increase 7.8% year-over-year to $536.52 million for the fiscal year ending December 2023. Shares of FSTR have gained 138.3% over the past year to close the last trading session at $21.80.
FSTR has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Growth, Value and Quality. It is ranked first in the same industry.
Beyond what is stated above, we’ve also rated FSTR for Stability, Sentiment and Momentum. Get all FSTR ratings here.
What To Do Next?
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WAB shares were trading at $126.98 per share on Friday morning, up $0.02 (+0.02%). Year-to-date, WAB has gained 28.04%, versus a 26.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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