According to a recent study done by a major consulting firm, a 1% increase in price can lead to a 12.3% increase in operating profit when holding other factors constant. Meanwhile cost cutting is nowhere near as profitable since the same study showed a 1% decrease in variable cost only leads to an 8.7% increase in operating profit and 1% decrease in fixed cost equals a 2.6% increase in operating profit. A careful analysis of industries that are able to raise prices, without losing customers to substitute products, can lead to some attractive stock picks.
One of these industries is the railroad industry. The only viable low cost long haul substitute to rail transportation is commercial trucking. Since trucking requires more fuel per lb. then railroads, the high price of gasoline has put trucking companies at a disadvantage. Railroads are able to pass along the increase their fuel costs and raise prices to improve profitability without the risk of losing customers to trucking companies. Also railroads are benefiting from the continuing rise in cross-Pacific shipping and the soaring demand for coal as a powerplant fuel.
Even though many railroads company’s stocks have undergone a dramatic rise in the past 12 months, Burlington Northern Santa Fe Corp (BNI) still has room left for appreciation. It recently announced an increase in its freight surcharge program and signed an agreement with the Canadian National railway to share track and terminals in certain locations. The company has earmarked $400 million for track and facilities expansion between high demand locations and is adding locomotive capacity with advanced technology to monitor track usage. So don’t let the company’s high share price scare you ($78.75) or its $25 rise over the last year scare you, this company is going higher.
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