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Union Pacific Is Our Favorite Railroad Today

Valuations have become lofty in much of the intermodal space, but there are still some opportunities for investors, says Morningstar's Matthew Young.

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Matthew Young: The $18 billion rail intermodal industry (referring to the movement of shipping containers on rail cars) ran into a few stubborn headwinds in 2016, but we don't think these factors will derail its long-term growth potential. Intermodal has also become the secular growth story for the North American railroads, and we think it will continue to offset the impact of lackluster coal carloads. That said, investors should tread carefully. Opportunities exist in the space, but in some cases valuations have become lofty.

The broader intermodal landscape enjoyed solid expansion throughout most of the current economic expansion phase, with 6% average container volume growth between 2010 and 2015. And over that period, robust truck to rail conversion activity played a key role in its growth over and above retail sales. However, container demand hit a rough patch in 2016 for two key reasons. First, cheap diesel fuel, and second, falling rates across the competing over-the-road truckload industry linked to excess capacity.

Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.