Stock Picks: CSX Up, RCL Down

Railroad stocks got up a decent head of steam Tuesday after Berkshire Hathaway (BRK.A) announced it would buy up the 77% of Burlington Northern (BNI) that it doesn’t already own. The $44 billion deal by investor Warren Buffett sent the entire Dow Jones Transportation index up about 5% in midday trading.

Freight giant CSX (CSX) was among the biggest gainers, with the stock rising 6%. Tom Hund, Burlington Northern's chief financial officer, said the $100-a-share offer was in the best interest of the company. "The transaction offers an approximate 30% premium to the recent BNI share price and provides an opportunity for shareholders to participate in future growth through Berkshire Hathaway shares," he said on a Tuesday conference call.

Sterne Agee analyst Jeff Kauffman said the deal was a shrewd pickup for Buffett and that it pointed to confidence in a rail renaissance pricing story.

"We believe that this transaction allays recent fears that the railroads’ recent pricing strength is coming to an end," he wrote. "If the rails’ long-term fundamentals were at risk, Berkshire would not be buying the entire company. We believe this deal will also allay investor concerns that regulation will significantly depress returns for the sector."

The recession has hit transportation hard, since fewer purchases mean fewer goods are manufactured and shipped to stores.

"We expect the shares of BNI and to a lesser extent railroad stocks in general to react favorably to the terms of this acquisition that comes at a more than 30% premium to yesterday's close," Deutsche Bank analyst Justin Yagerman correctly wrote.

Bottom Line: Hold
It may take some time before these stocks really get rolling, but they should get momentum if a recovery pushes shipping volumes.

Weak earnings and high fuel prices scuttled Royal Caribbean Cruises (RCL) shares Tuesday, despite beating Wall Street forecasts. Third-quarter profit came out to $1.07 a share, a 44% drop from $1.92 a year earlier. Analysts, on average, had expected $1 a share. However, the cruise company also guided to a fourth-quarter loss of five cents a share, and a full-year profit of 70 cents a share, in line with Street estimates.

"Like many other travel companies, we saw more strength than we expected during our peak season but have been experiencing more pricing pressure on some of our traditionally softer fall season sailings," Chairman and CEO Richard Fain said. "Overall though, the business environment is largely unchanged and stable. We expect the yield deficit to continue to improve in the fourth quarter and we remain optimistic that 2010 will bring year-over-year yield improvement."

That's true of the larger leisure sector as well, Citigroup analyst Gregory Badishkanian wrote Thursday. "Our checks indicate retail sales have been getting 'less bad' in 3Q vs. 2Q for the leisure group," he wrote, adding that trends suggest "the company should be able to achieve guidance of $0.95-$1.00. Similar to what Carnival Cruise Lines (CCL) reported, we'd expect decent 2010 booking and pricing trends.” Badishkanian added that he is also encouraged by pricing trends for Royal Caribbean’s new Oasis, said to be the world's largest cruise ship and scheduled to set sail in December.

Samir Bendriss, an analyst at Pareto Securities, suggested the recent dip was a buying opportunity. "We would not put too much emphasis on Q4, as this is traditionally the softest season, but we are aware of the negative yield risk," he wrote. "That being said, we continue to believe in positive yields in Q1’10 and 2010. Management also believes in positive yields, and in case, the realistic yield outlook for 2010 is far from financial distress scenarios in our view."

Bottom Line: Buy
This may be the right time to get on board, before economic recovery leads to anchors aweigh style growth.