(FORTUNE Magazine) – In the past 12 months, as most of the rest of the market has cannonballed forward, railroad stocks have chugged ahead only 3%. Now, security analysts say, they are poised to really move. If the economy picks up, as many economists expect, the roads will harvest the fruits of substantial cost cutting and restructuring. Because railroads are a slow-growing industry, their shares usually sell at price-earnings multiples below the market's. But their average P/E of 12 times estimated 1987 earnings represents an unusually steep 35% discount from the market multiple. Railroads are no longer as alike as a string of hopper cars. The 1980 Staggers Act, which let railroads compete freely on rates, also made it easier for them to sell off underutilized branch lines, merge, and make acquisitions. The industry has consolidated into a half dozen dominant roads, most of which have diversified into oil and gas, pipelines, real estate, trucking, even ocean shipping. Union Pacific, a Western road whose properties are a trove of natural resources, saw its earnings roll ahead a solid 22% last quarter. Andras Petery, a rail analyst at Morgan Stanley, expects earnings to grow at a 15% annual rate for the next five years because of dramatic cost reductions and higher revenues in the company's oil business. Last year analysts applauded when Union Pacific picked up a trucking company, Overnite Transportation, and a new president and chief operating officer, former Transportation Secretary Drew Lewis. Petery, who strongly recommends the stock, says it should double over the next five years. Henry Livingston of Kidder Peabody thinks CSX, an Eastern road, will begin to pick up speed later this year on the strength of its purchase of Sea-Land, a large container ship operator. ''I think the Sea-Land acquisition will really come together for CSX in 1988 as it is consolidated into the company,'' he says. CSX could raise a tidy $250 million or so under the proposed sale of its Miami-West Palm Beach trackage to the state of Florida, which wants it for commuter service. CSX trains would use the road in off-peak hours. Michael Armellino of Goldman Sachs recommends Burlington Northern and Norfolk Southern. He's fond of Burlington Northern because of its bountiful ''free'' cash flow in excess of required capital expenditures, highest among the railroad group. ''With all of that cash, I think Burlington Northern will raise the dividend, buy back stock, and refinance high-cost debt,'' he says. Burlington Northern's revenue per employee has shot up 94% since 1980, to $111,000 a year, the highest in the industry. Analysts think Norfolk Southern, with its broad exposure to industry and consumers -- it owns North American Van Lines -- could really click if momentum builds in the economy. Armellino likes the company's sound balance sheet and fat profit margins. Already cash rich, Norfolk Southern recently pocketed a $33-million profit when it sold part of its 19% stake in Piedmont Aviation to USAir. ''I think they too will raise the dividend and buy back stock, and will make a substantial acquisition in the transport business over the next several quarters,'' says Armellino. Investors can now take a ride on Conrail, since it was sold by the government in March for $1.6 billion, the largest U.S. initial public offering ever (see Politics & Policy). Says James Voytko of Paine Webber: ''Conrail's first-quarter earnings were impressive. Traffic gains were ahead of the competition, and operating income was up 50%.'' Analysts used to wonder whether Conrail could survive without leaning on the big shoulder of Uncle Sam. Voytko, for one, thinks the road will do just fine: ''Conrail has an experienced management team.'' The great unknown is Santa Fe Southern Pacific. Over three years ago the parent companies of the Santa Fe and the Southern Pacific merged, but joining their rail operations still requires Interstate Commerce Commission approval. Last year the ICC rejected the tie-up, and, following a company appeal, will decide this month whether to reopen the case. Most analysts suggest waiting for the smoke to clear before buying this stock. Some investors, apparently of the ''I think I can, I think I can'' school, are jumping aboard anyway. The stock has roared ahead 41% so far this year, partly on the news that the Henley Group had purchased 4.9% of the shares.

CHART: COMPANY REVENUES NET STOCK PRICE RECENT latest four INCOME RANGE PRICE quarters in millions last 12 months P/E multiple* in millions

Burlington Northern $6,635.0 ($538.6) $46.50-$72.50 $65.00 N/A CSX $6,549.0 $406.0 $25.625-$36.125 $30.50 $11.5 Union Pacific $6,063.0 ($441.4) $49.875-$80.50 $69.50 N/A Santa Fe Southern $5,583.5 ($121.7) $26.25-$42.75 $41.75 Pacific N/A Norfolk Southern $4,040.0 $539.8 $24.625-$33.125 $29.00 ! 11.3 Conrail $3,157.0 $234.0 $28.75-$31.625 $30.75 9.1

* Multiple based on earnings for the latest four quarters.

CREDIT: NO CREDIT CAPTION: Stocks That Could Pick Up Steam Three of these railroad stocks sell at enticingly low multiples. And don't be derailed by recent losses of the others: They have taken write-offs in cost- cutting moves that should stoke future earnings.

DESCRIPTION: See above.