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As North America heads into what many believe will be a sustained period of muted economic growth, investors are looking for businesses that can deliver above-average gains. Strip away risky e-commerce, smartphones and commodities and what are you left with? Railways, for one. In fact, there are ample reasons to believe the "railway renaissance" that began in the mid-1990s still has plenty of track to run.

Old-economy businesses tend to struggle to outpace overall economic growth and find gains from consolidation and cost-cutting. Consolidation has run its course in the North American railway business while, with the exception of underperforming Canadian Pacific Railway Co.(now under the tough leadership of former Canadian National Railway Co. boss Hunter Harrison), the cost-cutting cycle is largely done. Meanwhile, the industry's traditional stronghold – thermal coal – is in trouble, as U.S. utilities shift to natural-gas-fired plants under regulatory pressure. Norfolk Southern Corp. alone saw coal revenues drop by $579-million (U.S.) or 17 per cent in 2012 from the year before.

But while the industry would have buckled under that strain 15 years ago, and lost money 10 years ago, "overall industry earnings were up across the board" in North America, leading railway analyst Anthony Hatch said. The drop in coal revenue is being countered by gains in other parts of the business. With its tiny thermal coal business, CN is already earning above-GDP returns that point to a similar future for other railways.

Oil and gas: The development of oil and gas fields in North Dakota's Bakken region and the Alberta oil sands has spurred on the "crude by rail" business. Pipeline capacity is tight and regulatory hurdles have added years to projects on the boards – a gap railways can fill quickly. The shale gas development boom has also led to huge increases in shipments of sand, used in the fracturing process to access those energy deposits. Mr. Hatch estimates that increasing oil and sand shipments alone have made up for about half of the $2-billion in lost annual coal revenues from 2008 to 2011.

Insourcing and Nearsourcing: Some of the production that shifted overseas over the past 15 years is returning to North America, as costs rise in Asia and energy prices decline here (call it the Bakken effect). The big shift is in the energy-intensive chemical manufacturing business, where $30-billion in U.S. plant projects are in the works. General Electric Co. and other industrial manufacturers have begun shifting production back to North America. This of course represents a huge opportunity for the railways, which have lots of underused capacity in the revitalizing rust belt. Auto makers have also been shifting production from overseas to Mexico, resulting in increased transport by rail at the expense of sea travel.

Trains v. Trucks: For three decades railways have been stealing back some of the business trucks took away from them years earlier. Now, railways are kicking their so-called "intermodal" business – shipping containers that fit on to trucks or trains – into high gear. CN, CSX Corp. and others are investing in intermodal terminals across the continent and say there are 20 billion truckloads of business per year for the taking across North America. Their pitch is that their service has improved and rail offers greater efficiency (using far less fuel and carrying far more goods), particularly on longer-haul routes, while trucking companies are having trouble retaining drivers. The railways have also spent tens of billions of dollars upgrading their networks, while governments can't afford to modernize crumbling roadways. "That continues to make privately financed rail networks look that much more attractive," Mr. Hatch said.

Exports: Despite the drop in U.S. demand for thermal coal, export markets are expected to pick up for both thermal and metallurgical coal (used to make steel) and for potash, wheat, corn and other agricultural exports. This should also feed above-GDP railway growth – explaining why such billionaire investors as Bill Gates, Warren Buffett and Carl Icahn have invested in the industry for the long haul.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
CNI-N
Canadian National Railway
+0.05%131.71
CNR-T
Canadian National Railway Co.
-0.15%178.37
CP-N
Canadian Pacific Kansas City Ltd
-0.33%88.17
CP-T
Canadian Pacific Kansas City Ltd
-0.54%119.43
CSX-Q
CSX Corp
+0.62%37.07
GE-N
General Electric Company
-2.55%175.53
NSC-N
Norfolk Southern Corp
+1.25%254.87

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