If the economy is starting to hum, the railroads must be, well, on track. Indeed, as strong signals indicate the economy is heading for a firm recovery, investors are rediscovering the railroads, which are among the first to benefit from improved economic activity.

One example is CSX (CSX), a major provider of rail-based transportation services, whose shares have trekked up from $42 in early February 2010 to $50 on March 12. A year ago, the stock was at a 52-week low of $21. CSX has a 21,000-mile network serving 23 Eastern states and the provinces of Ontario and Quebec.

Wall Street analysts have also given CSX a green light. Of the 26 analysts who track it, 18 recommend buying the stock, and seven peg it at hold. Only one recommends unloading it.

Heading to $65 or $70?

Why pick CSX? "It's the best bet among the railroads because of its vast assets, strong earnings prospects and a solid balance sheet, with a cash stash of $1 billion," says Carl Birkelbach, president of Birkelbach Investment Securities, which owns shares. He predicts that as the recovery gains traction, CSX stock will hit $65 to $70 in a year.

With CSX transporting many of the basic materials required in manufacturing and construction, including coal and scraps used by steel mills, the company is sure to gain from the recovery, says Standard & Poor's analyst Kevin Kirkeby, who rates the stock a buy with a 12-month target of $59 a share. CSX deserves a higher valuation, he says, because of its solid cash flow and signs that freight volumes are starting to recover. Coal alone accounted for 30% of 2009 revenue. But the biggest contributor is its merchandise freight, including chemicals, forest products, metals and agricultural products, which combined to generate 48% of total revenue.

Kirkeby forecasts that revenue will increase 7.5% this year, based on a 3.7% rise in freight volume -- particularly in the fertilizer and automotive sectors -- and price increases. Automotive shipments in 2009 accounted for just 6% of sales, but Kirkeby figures shipments will pick up as auto production increases to meet an expected jump in demand.

"A Solid Long-Term Investment"

Overall freight volume, analysts say, has nowhere to go but up. After three years of declines, "we believe the stage is set for a return to volume growth in 2010," says William J. Greene, analyst at Morgan Stanley, who rates the stock as overweight. Inventories have moderated, and inventory draw-downs have come to close in several sectors, he notes, so demand for transportation services has been on the rise. (Morgan Stanley owns shares and has done banking for CSX.)

Greene says his bullish views toward CSX were more than validated after his recent meeting with CSX management. So now "we have increased confidence that shares of CSX are a solid long-term investment," says Greene. In the universe of railroads he follows, CSX has the most potential to exceed analysts' consensus earnings estimates for 2010 and 2011, says Greene. His own forecast has CSX earning in 2010 rising to $3.50 per share and to $4.50 in 2011, up from $2.85 in 2009.

"The freight recession is likely over," says railroad analyst Rick Paterson at investment firm UBS, who notes that according to available data, U.S. railroad-car loadings have been on the rise. "We may indeed be emerging from the freight recession that began in the fourth quarter of 2006," says Paterson, who rates CSX a buy. (UBS owns shares and has done banking for CSX.)

The Peak Is Yet to Come

Among the large institutional investors that have been buying CSX shares are Capital Research, which bought 6.1 million shares as of Dec. 31, 2009, bringing its total stake in CSX to 10.5%, and Fidelity Management, which purchased 5.5 million shares to raise its holdings to 7.5%.

With the economy hardly in full throttle, rail stocks such as CSX haven't yet reached their peak. So for investors who want to take a ride with CSX, time is still on their side.

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