1 recession-proof infrastructure stock to watch

With huge infrastructure spending on the horizon, railways like Pacific Union (NYSE: UNP) could be big winners and could also help protect your portfolio in a recession. In this fool live Video clip, recorded on September 13, Senior Analyst Asit Sharma and Fool.com Contributor Matt Frankel, CFP, explain why Union Pacific is on Asit’s shortlist of infrastructure stocks to watch.

Asit Sharma: This is Union Pacific, Matt, UNP symbol. I’m trying to be consistent here with something I’ve said over the last, I don’t know, year to 18 months and multiple times on Live with Jason. I referred to the railways as a great infrastructure game. I love their strong cash flow. For example, Union Pacific generated $ 4.2 billion in operating cash in the last quarter, not last year. If you go for the best of breed, which to me Union Pacific is one of the best investments in this space, I think you can benefit from future investments in infrastructure. The industry has few headwinds against it now. We have chip shortages, which causes a bit of variability in auto shipments. We have higher gas prices. Fuel prices are having an impact on the outlook for investors in the rail industry. But overall, you have a business at Union Pacific that has improved their operational efficiency by leaps and bounds. They reached an operating ratio of 55.1% in the last quarter. To translate that for those of you who don’t follow this industry, these are very efficient operations. The lower the score, the better. This is an improvement of around six percentage points from the previous year’s quarter. It’s also a great dividend-paying stock. I think they are very well placed to take advantage of future infrastructure investments. There are a few dots in this image in the Biden administration’s infrastructure plans. They have curved balls that they threw at the rail industry in that the railways will have to work together and share access to a few points, which they weren’t required to do before in the part of this plan. But they’ve been preparing for it for several years, so I think it will go well. Union Pacific itself has a very fluid network, excellent switching yards. I don’t think it will be a problem for them to share access points here and there with their worthy competitors. Overall, when looking to build a portfolio of really good infrastructure stocks, think of this as core holding. It might not be the one you expect the most, but it definitely has its place in a wallet like this. If nothing else happens, you will continue to reap the rewards of this strong cash flow. Like I said, wonderful dividend action. Lots of big improvements in their metrics over the past few years. I see further share price growth coming for Union Pacific. This is one of my best ideas for next year. It’s consistent with what I’ve been really saying for almost a year, a year and a half.

Matt Frankel: It’s also a really good recession-resistant game, it’s worth mentioning. The rail industry is great. If we get a real recession, not like the COVID recession that lasted March and April of last year, but a real deep recession.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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