Investopedia: A Primer On The Railroad Sector

Maybe it seems quaint that an industry most associated with robber barons, the 19th century and the taming of the West even survives today, but railroads are still very much a significant part of the North American economic infrastructure. As major components of the transportation sector, railroad companies and their stocks are certainly worth the time and trouble to investigate further as their cyclical nature suggests that there will always be opportunities again in the future to buy (or sell) these stocks.

What the Railroads Do
To a certain extent, railroad companies operate a pretty straightforward and obvious business – they charge companies for carrying cargo over their network of rails and railcars. In practice, it is a bit more complicated than that.

Major railroads in North America basically operate as duopolies – Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern Santa Fe run routes throughout the Western U.S., Norfolk Southern (NYSE:NSC) and CSX (NYSE:CSX) control the East, and Canadian Pacific (NYSE:CP) and Canadian National (NYSE:CNI) operate throughout Canada. Again, though, the details are a little more complicated.

Within the rail industry, railroads are frequently broken up by category – Class I, Class II and Class III railroads. The distinctions between classes are a product of the railroad's revenue, with Class I being the largest and Class III being the smallest. In actual practice, though, these categories have questionable value – Kansas City Southern (NYSE:KSU) is technically a Class 1 railroad, but is much smaller than even the smallest of the "Big Six". Nevertheless, it is worth noting that there is profit opportunity not only in running large continental networks, but also operating smaller short-line railroads that connect industries to supply sources (like a power plant and coal mine) or connect companies and small towns to larger railroad lines. (Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth. (For more insight see Great Company Or Growing Industry?)

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http://www.investopedia.com/articles/stocks/11/primer-on-railroad-sector.asp