Cramer's Fave Rail: Union Pacific or Norfolk Southern?

Cramer Rides the Rails: UNP vs. NSC

When it comes to railroads, says Mad Money's Cramer, there's no question Union Pacific is a much better company than Norfolk Southern. UNP has a stronger business; more re-pricing catalysts; and trades at a smaller premium than NSC, and that make it a better buy.

A “Mad Money” viewer asked Cramer to pick his favorite railroad stock: is it Union Pacific or Norfolk Southern?

Union Pacific has had a monster run, having climbed more than 42 percent since early October. Norfolk Southern has rallied about 20 percent over the same time period. UNP sells for 14 times earnings while NSC trades at 12 times earnings. Both have a 16 percent long-term growth rate, meaning NSC is cheaper. But Cramer thinks it’s a good idea to actually pay up for “best of breed” Union Pacific.

Cramer prefers UNP because it has been able to raise prices as its old contracts expire. About 8 percent of its contracts are up for re-pricing this year while Norfolk Southern has just 3 percent of contracts coming up for re-pricing.

Union Pacific also has less coal than Norfolk Southern. Natural gas prices have fallen so low that it’s giving coal a run for its money, not to mention risk of potential government regulators, like the EPA. If President Barack Obama is re-elected, Cramer thinks there will be even more regulations on coal. Union Pacific only gets 22 percent of its revenues from coal while Norfolk Southern gets 31 percent.

Finally, Union Pacific recently reported stronger earnings results than Norfolk Southern did. Last month, it delivered an 18-cent earnings beat on a $1.81 basis with stronger-than-expected revenues that rose by 15.8 percent year-over-year. Norfolk Southern reported an operational miss with earnings coming in at $1.42 a share, a 2-cent earnings beat thanks to a lower tax rate.

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