Proof the Economy Is on Track

“With no employment growth, and a fear that Washington’s anti-stock agenda will crimp the earnings of all kinds of companies across the board, the sense of doom and gloom, the Jimmy Carter-esque malaise, is almost palpable,” Cramer said Monday. “We’re in a moment where it feels like there is no good news.”

But that’s not entirely the case.

Cramer used Union Pacific , the largest US rail, to prove that our economy is showing increasing signs of strength. Remember, this is about as cyclical a company as you can get. So if business is revving up here, then it means business is revving up other sectors, too.

Just a couple weeks ago, CEO James Young told the Bank of America Transport conference that quarter-to-date carloads jumped 17%, while UNP moved 170,000 carloads in the most recent week, up from the mid-160,000s in the last three months.

Young also said that pure pricing has increased more than 3.5% and should continue in that direction for the rest of 2010. Plus, Union Pacific is pulling its workers off furlough and putting them back to work – down from 5,300 employees at the peak to 3,350 now – and unused trains are back on the tracks, with the number of idle locomotives dropping to 1,350 from 2,100.

“These guys wouldn’t be putting more trains back on the rails,” Cramer said, “if they believed the economy was going off the rails.”

Young followed his pronouncements just last week with even more good news, this time at the Deutsche Bank Industrials conference. All six of Union Pacific’s businesses – energy, industrial, agricultural, chemicals, intermodal and autos – saw volume growth in the second quarter through June 19, with autos alone soaring 69%. All of this is happening despite the weakness is UNP’s housing business, Cramer said, which makes it all the more impressive. And the company pulled another 500 workers off furlough and put another 500 idle trains back to work just a week later.

To lend some objective legitimacy to Young’s statements, the Association of American Railroads has reported that intermodal rail traffic was up 21% versus last year, the highest since 2008, and US railroad carlods were up 9%.

Cramer likes the China kicker as well, as increased demand for coal from that country will further boost UNP, which gets 23% of revenues from its energy business. And there’s the comment from the company’s chief financial officer, who said he thinks Union Pacific could snatch about 12 million loads worth of business a year from highway trucking. UNP also upped its dividend by 22% in May, which is another sign that the business is strong here.

Given the strength of this company, the stock is cheap. Sure, with a 12.9 multiple it trades at a premium to CSX and Norfolk Southern (12.3 and 12.9, respectively), but the long-term growth rate is just 12%. That puts UNP below Cramer’s 1:1 multiple-to-growth ratio, which is his definition of an inexpensive stock.

“I found at least one American company that's optimistic about the future, and it’s Union Pacific,” Cramer said. “And with volumes on the mend and pricing increasing, I think they're right to be bullish. Take a ride on the Union Pacific line, this one's a … buy”

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