Fortunes were once made and lost on our nation’s railroads. But investors navigating our modern information-based economy have come to view railroads as a quaint relic. Railroads are gathering steam as environmental and safety considerations have made them increasingly viable options for cargo shipping across the country.–The Editors

Enjoying a diverse freight mix that includes coal, general merchandise and intermodal freight, Norfolk Southern (NYSE: NSC) will experience improving volume growth as the US economic recovery continues. Coal volume will increase as consumption grows and stockpiles decline; chemical volume will also benefit from a rebounding manufacturing sector.

Norfolk Southern has allocated significant funds to improving its efficiency, including $1.5 billion in spending this year and more than $1 billion slated for the next few years. One such upgrade is a sophisticated software system that coordinates the hundreds of trains and thousands of shipments that Norfolk Southern moves across the US on a daily basis. That software has improved on-time performance and cut terminal dwell times, making Norfolk Southern the safest and most efficient US railroad.

A decade of work and more than $320 million in spending from Norfolk Southern, three states and the federal government have given a needed facelift to the Heartland Corridor. The 379-mile line that runs from the seaports of Virginia to Chicago is now outfitted for double-stacked intermodal freight cars. Those double-stacked trains will not only lower costs for shippers, but should also add nearly 33 percent to the revenue the railroad will realize on each train. Norfolk Southern has already shifted 30 percent of its overall volume to the new route since it opened in September. The railroad plans to move another 10 percent to the line by mid-2011 as additional infrastructure improvements are completed.

Norfolk Southern is also working on a long-term project dubbed CREATE that will expand its network on the Eastern Seaboard while adding additional passenger and freight capacity in the metropolitan Chicago area. Upon completion the expanded network is expected to accommodate 28 additional daily trains and greatly increase the railroad’s velocity.

In the short term, tightening truckload capacity should help boost Norfolk Southern’s cargo volumes. Federal safety authorities are expected to reduce driving time for truckers from 11 hours per day to 10 hours early next year as part of the “Comprehensive Safety Analysis 2010” program.

More stringent trucking safety standards are expected to coincide with rising equipment and fuel costs, factors that should boost intermodal volume as a growing amount of freight finds its way to the rails. Norfolk Southern has focused on boosting intermodal capacity–which accounted for about 20 percent of revenue in 2009–and that shifting demand should play to the firm’s strength. It will also benefit the railroad’s Triple Crown Services subsidiary, which operates 800 tractors and 7,000 containers out of 14 rail terminals on the Eastern Seaboard.

In addition to its excellent growth prospects, Norfolk Southern has more than $1 billion in cash on its balance sheet and only a modest amount of debt. It generates substantial free cash flow–more than $1 billion in the third quarter alone–which amply covers its 36 cent quarterly dividend.

With the company’s earnings forecasted to grow in excess of 20 percent over the next five years and shares trading at a forward price-to-earnings ratio of just 13.5, this is an excellent time to establish a position in the railroad. –Benjamin Shepherd

WHY TO BUY

NORFOLK SOUTHERN (NYSE: NSC, $62.83)

*Extensive investment in both infrastructure and efficiency

*Most extensive rail network in coal-rich eastern states

*Attractive valuation