rails


Possibly it is the Buffett effect, or it was just their time in the sun. Certainly their fundamentals are solid, it just seems that they have run too far, they have become overvalued.

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US Railways are currently a prime example of capitalism and it’s benefits as opposed to socialism and it’s myriad failures.

As the map demonstrates, the network of rail-lines covers the continental United States efficiently.

Amtrak’s passenger services are sparse compared with Europe’s. But America’s freight railways are one of the unsung transport successes of the past 30 years. They are universally recognised in the industry as the best in the world.

Their good run started with deregulation at the end of Jimmy Carter’s administration. Two years after the liberalisation of aviation gave rise to budget carriers and cheap fares, the freeing of rail freight, under the Staggers Rail Act of 1980, started a wave of consolidation and improvement. Staggers gave railways freedom to charge market rates, enter confidential contracts with shippers and run trains as they liked. They could close passenger and branch lines, as long as they preserved access for Amtrak services. They were allowed to sell lossmaking lines to new short-haul railroads. Regulation of freight rates by the Interstate Commerce Commission was removed for most cargoes, provided they could go by road.

Before deregulation America’s railways were going bust. The return on capital fell from a meagre 4.1% in the 1940s to less than 3% in the 1960s. In 1970 the collapse of the giant Penn Central caused a huge shock, including a financial crisis. By 1980 a fifth of rail mileage was owned by bankrupt firms. Rail’s share of intercity freight had slumped to 35% from 75% in the 1920s. Tracks were neglected and fell into disrepair, leading to a downward spiral of speed restrictions and deteriorating service. The term “standing derailment” was coined to describe the toppling-over of stationary freight wagons when the track gave way beneath their wheels.

The profitability of capitalism when compared to the failure of socialism:

Of course this is not the first historical instance of the railways being regulated, deregulated and again regulated only to be deregulated and again, looking like being regulated again.

Giving the railroads the freedom to run their business as they saw fit led to dramatic improvements. The first result was a sharp rise in traffic and productivity and fall in freight costs. Since 1981 productivity has risen by 172%, after years of stagnation. Adjusted for inflation, rates are down by 55% since 1981 (see chart 1). Rail’s share of the freight market, measured in ton-miles, has risen steadily to 43%—about the highest in any rich country.

So why would you choose to re-regulate the industry – after government proved that they are totally clueless fools?

Another looming threat is re-regulation. Fed up with increasing rates, customers, notably chemical, coal, agribusiness and utility companies, are complaining that these are evidence that the railroads are abusing their market power. The railroads retort that despite record traffic and profits, their return on investment since 2000 has been only 8%, which according to the Surface Transportation Board, another federal regulator, barely covers the cost of capital. They also say that freight rates are usually governed by what their competitors—ie, truckers—charge. When higher diesel costs put up trucking rates, the railways follow suit.

Really?

Government is simply corrupt. They are so deeply in bed with their corporate paymasters that they simply cannot be trusted to undertake any decisions that impact the individual in any capacity.

The freight railroads have learned to live with the limited Amtrak passenger services on their tracks. Occasionally they moan that Amtrak pays only about a fifth of the real cost of this access. Some railmen calculate that this is equivalent to a subsidy of about $240m a year, on top of what Amtrak gets from the government. Freight-rail people regard this glumly as just part of the cost of doing business, but their spirits will hardly lift if the burden grows.

Their main complaint, however, is that one Amtrak passenger train at 110mph will remove the capacity to run six freight trains in any corridor. Nor do they believe claims that PTC, due to be in use by 2015, will increase capacity by allowing trains to run closer together in safety. So it will cost billions to adapt and upgrade the lines to accommodate both a big rise in freight traffic and an unprecedented burgeoning of intercity passenger services. Indeed, some of the money that the White House has earmarked will go on sidings where freight trains can be parked while intercity expresses speed by.

Obviously the consumer, is not interested in paying for the service, thus it should not be provided. Price is the markets method of allocating scarce resources. If consumers do not want the service, and obviously they don’t, then don’t waste resources providing it. The profit is in transport of goods. Transport goods.

As goes rail traffic, as goes the US economy. Canada is included here in the analysis, and has incidentally good looking data.

Operating Statistics………………..2007…………2008………..2009
Freight Revenue Per Ton-Mile….. 2.990¢…….. 3.343¢……. 3.011¢
Average Tons Per Carload ……….61.7……….. 63.1……….. n.y.a.
Average Tons Per Train………… 3,274……… 3,414 ………..n.y.a.
Average Length of Haul (miles)… 912.8…….. 919.1……….. n.y.a.

Freight Revenue (billion)……….. $52.9……… $59.4……… $46.1
Operating Revenue (billion)……. $54.6………. $61.2…….. $47.8
Operating Expense (billion)……. $42.7………. $47.3……… $37.2
Net Income (billion)…………….. $6.8……….. $8.1……….. $6.4
Operating Ratio………………… 78.3%……… 77.3%…….. 77.8%
Return on Average Equity……. 11.49%……. 13.26%…….. n.y.a.

P/E data

Leaders in P/E Ratio (ttm)
American Railcar Industries, In [ARII] 55.00
RailAmerica, Inc. Common Stock [RA] 48.38
Kansas City Southern Common Sto [KSU] 39.12
Genesee & Wyoming Inc. Class A [GWR] 24.51
Wabtec Corporation Common Stock [WAB] 20.86
Norfolk Souther Corporation Com [NSC] 20.16
Union Pacific Corporation Commo [UNP] 18.73
CSX Corporation Common Stock [CSX] 18.27
Portec Rail Products, Inc. [PRPX] 16.50
Canadian Pacific Railway Limite [CP] 15.68

Laggards in P/E Ratio (ttm)
Canadian National Railway Compa [CNI] 15.08
Canadian Pacific Railway Limite [CP] 15.68
Portec Rail Products, Inc. [PRPX] 16.50
CSX Corporation Common Stock [CSX] 18.27
Union Pacific Corporation Commo [UNP] 18.73
Norfolk Souther Corporation Com [NSC] 20.16
Wabtec Corporation Common Stock [WAB] 20.86
Genesee & Wyoming Inc. Class A [GWR] 24.51
Kansas City Southern Common Sto [KSU] 39.12
RailAmerica, Inc. Common Stock [RA] 48.38

PEG ratio

Leaders in PEG Ratio (ttm, 5yr expected)
Trinity Industries, Inc. Common [TRN] 3.16
Canadian Pacific Railway Limite [CP] 2.69
RailAmerica, Inc. Common Stock [RA] 2.30
Portec Rail Products, Inc. [PRPX] 2.23
Wabtec Corporation Common Stock [WAB] 2.03
CSX Corporation Common Stock [CSX] 1.77
Norfolk Souther Corporation Com [NSC] 1.67
Kansas City Southern Common Sto [KSU] 1.64
Canadian National Railway Compa [CNI] 1.52
Genesee & Wyoming Inc. Class A [GWR] 1.51

Laggards in PEG Ratio (ttm, 5yr expected)
Genesee & Wyoming Inc. Class A [GWR] 1.51
Union Pacific Corporation Commo [UNP] 1.51
Canadian National Railway Compa [CNI] 1.52
Kansas City Southern Common Sto [KSU] 1.64
Norfolk Souther Corporation Com [NSC] 1.67
CSX Corporation Common Stock [CSX] 1.77
Wabtec Corporation Common Stock [WAB] 2.03
Portec Rail Products, Inc. [PRPX] 2.23
RailAmerica, Inc. Common Stock [RA] 2.30
Canadian Pacific Railway Limite [CP] 2.69

Return on Equity

Leaders in Return on Equity (ttm)
Canadian National Railway Compa [CNI] 17.32%
Wabtec Corporation Common Stock [WAB] 15.46%
CSX Corporation Common Stock [CSX] 13.94%
Union Pacific Corporation Commo [UNP] 12.49%
Canadian Pacific Railway Limite [CP] 11.59%
Norfolk Souther Corporation Com [NSC] 10.99%
Portec Rail Products, Inc. [PRPX] 10.98%
Genesee & Wyoming Inc. Class A [GWR] 10.29%
Guangshen Railway Company Limit [GSH] 5.92%
Kansas City Southern Common Sto [KSU] 5.32%

Laggards in Return on Equity (ttm)
Greenbrier Companies, Inc. (The [GBX] -22.68%
Trinity Industries, Inc. Common [TRN] -9.26%
RailAmerica, Inc. Common Stock [RA] -1.45%
Providence and Worcester Railro [PWX] -1.29%
Freightcar America, Inc. [RAIL] -0.37%
American Railcar Industries, In [ARII] 1.79%
Kansas City Southern Common Sto [KSU] 5.32%
Guangshen Railway Company Limit [GSH] 5.92%
Genesee & Wyoming Inc. Class A [GWR] 10.29%
Portec Rail Products, Inc. [PRPX] 10.98%

Profit Margins

Leaders in Net Profit Margin (mrq)
Canadian National Railway Compa [CNI] 26.00%
Union Pacific Corporation Commo [UNP] 13.01%
CSX Corporation Common Stock [CSX] 12.28%
Norfolk Souther Corporation Com [NSC] 11.48%
Genesee & Wyoming Inc. Class A [GWR] 10.96%
Guangshen Railway Company Limit [GSH] 9.36%
Canadian Pacific Railway Limite [CP] 8.55%
Wabtec Corporation Common Stock [WAB] 8.34%
Kansas City Southern Common Sto [KSU] 8.09%
Portec Rail Products, Inc. [PRPX] 7.50%

Laggards in Net Profit Margin (mrq)
Freightcar America, Inc. [RAIL] -16.87%
American Railcar Industries, In [ARII] -13.43%
Greenbrier Companies, Inc. (The [GBX] -2.38%
RailAmerica, Inc. Common Stock [RA] -2.23%
Providence and Worcester Railro [PWX] -0.89%
Trinity Industries, Inc. Common [TRN] 0.44%
Portec Rail Products, Inc. [PRPX] 7.50%
Kansas City Southern Common Sto [KSU] 8.09%
Wabtec Corporation Common Stock [WAB] 8.34%
Canadian Pacific Railway Limite [CP] 8.55%

Dividend Yield

Leaders in Dividend Yield
Guangshen Railway Company Limit [GSH] 2.80%
Norfolk Souther Corporation Com [NSC] 2.20%
Portec Rail Products, Inc. [PRPX] 2.10%
Canadian National Railway Compa [CNI] 1.70%
CSX Corporation Common Stock [CSX] 1.70%
Canadian Pacific Railway Limite [CP] 1.60%
Union Pacific Corporation Commo [UNP] 1.40%
Providence and Worcester Railro [PWX] 1.30%
Trinity Industries, Inc. Common [TRN] 1.30%
American Railcar Industries, In [ARII] 0.80%

Laggards in Dividend Yield
Wabtec Corporation Common Stock [WAB] 0.10%
American Railcar Industries, In [ARII] 0.80%
Freightcar America, Inc. [RAIL] 0.80%
Providence and Worcester Railro [PWX] 1.30%
Trinity Industries, Inc. Common [TRN] 1.30%
Union Pacific Corporation Commo [UNP] 1.40%
Canadian Pacific Railway Limite [CP] 1.60%
Canadian National Railway Compa [CNI] 1.70%
CSX Corporation Common Stock [CSX] 1.70%
Portec Rail Products, Inc. [PRPX] 2.10%

snoopytyping_800x600

The Railway industry, once the premiere investment amongst listed securities. Today almost forgotten by the media. The history of the industry as listed securities extends for over one hundred years. During this time there have been tumultuous changes in the industry. Numerous bankruptcies, reorganizations and business vicissitudes have been hallmarks of the railway industry.

By way of concrete example, Penn Central, was the result of a merger between the “Pennsylvania Railroad” and the “New York Central Railroad” in 1966. Penn Central, by 1970 was itself bankrupt, and eventually reorganized into “Conrail” a government holding company, that was itself bought out by CSX Corp. and the Norfolk & Southern, one of the carriers under analysis.

Yet, through all these travails, the industry has remained vitally important to the American economy and industry. The industry in point of fact was so vital throughout America’s history, that regulation from Federal agencies has been a component of the industry, and remains partly in effect to this day, although, the regulation has started to give way in some instances to free market competition.

The Transport industry, of which the Railways form an important component, while possibly no longer possessing the glamour and excitement of the “GOOG’s” of the investment community, nevertheless provide an essential service to industrial and agricultural America, the same as provided by the “arterial” system to the heart. Yet, the investment community seems to have forgotten about the rail industry.

As investors, what if anything does the Rail industry offer us currently? This question is the one that we shall address. Historically the industry has always required large and regular infusions of new capital. It has been this requirement that has on many occasions led to the over-bonding of individual carriers. It is precisely this tendency within the industry that provides accurate warnings of impending problems with the individual carriers. Thus, the investment quality of both the Bonds and Common can be assessed via an examination of the statistical exhibit regarding interest payments and operating ratios.

The analysis of an individual company is usually carried on against a background of the industry to which it belongs. The future of the individual company usually being assumed to be inextricably linked with the industry. This has not always proven to be true however. The individual carriers have had an ignominious history of bankruptcy, reorganization and consolidation, much of it at the hands of the Federal government. This underlies the over-all importance of the industry, yet the consistent weakness of the individual carriers. It is interesting to note that in Europe, the rail industry has had a long history of “public” ownership via the governments public funding and support.

The overall number of Class 1 railways as defined by the Surface Transport Board (earnings in excess of $250 million) has decreased the number from many, to just a few over the past 100 years. Many of the previous great names are now just memories of stock market and operating history, yet they still exist for the most part in the three companies that are the subject of analysis within this report.

Taking a short walk down stock market history, we find that the total number of Class 1 Railways has dropped precipitously to the following names; BNSF (Burlington) Canadian National Grand Trunk Western RR, CSX Transportation Inc. Kansas City Southern RR, Norfolk Southern Combined, Soo Line RR and the Union Pacific. Compared to the list existing in the 1930’s………Atlantic Coast Line, Baltimore & Ohio, Canadian Pacific, Chesapeake & Ohio, Chicago & North, Chicago & Great Western, Chicago, Milwaukee, St Paul & Pacific, Chicago, Rock Island & Pacific, Great Northern, Illinois Central, New York Central, New York Chicago & St Louis, Norfolk & Western, Pennsylvania RR, Pere Marquette, Reading Co. St Louis, San Francisco, Union Pacific, and the Wabash and even this list is far from complete.

The long history of the railways, their trials and tribulations form a record that should teach today’s investors the lessons of the past. This lesson being, that no matter how important the over-all industry, to the economic prosperity of the nation, individual carriers have, through a variety of reasons become historical fact, and distant memories. Today’s investors would be prudent to heed the warnings of the past.

The analysis of the company, in its form, will in part be governed by the operating characteristics of the industry. Attention can be given to a myriad of factors, geographical location of markets and plant, to the character of competition, both internal, from other carriers, and external from, air, road and sea, to labor costs, government regulation, or deregulation, and special taxes. All of these components are important, and yet are reflected within the operating results over a period of time.

The Railway industry provides an embarrassment of wealth in regards to statistical information. This allows an analyst reliable quantitative data with which to analyze the business and its operations. There are three ratios which traditionally have been given the most importance or weighting. They are (1) the operating ratio, (2) the coverage of fixed and contingent charges, (3) earnings per share of common and preferred.

In a more detailed analysis, further study is undertaken within the financial and physical areas. Within the financial, further ratios are calculated for the maintenance of way, and equipment, and transport ratios. Within the physical, are calculated “net ton miles per train hour.” These ratios are calculated to examine the causal or correlative factors that result in poor or superior operational ratios. They identify the reasons for the either poor or superior statistical exhibit, via a measurement of costs against revenue, but do not alter the conclusion inferred by the analysis provided by the three traditional ratios.

10-mei-v16

The purpose of any research or analysis should have a “raison d’etre”. This will be to identify within the securities, opportunities for profitable buying, selling, or switching for the investor who holds, or is contemplating a holding in the securities so examined.

In the analysis provided, we have taken three of the Class 1 Railroads financial exhibits for examination. They are the Burlington & Santa Fe, the Norfolk & Southern and the Union Pacific. Within the financial exhibits the following questions need to be answered; for investors of Fixed Income are the interest payments covered sufficiently to ensure safety of Principal and continued income. For holders of the Common, does the market price now reflect an investment commensurate with the established earning power, or does the price represent a speculative operation?

Once satisfactory analysis has been completed, the answers to those questions should be self-evident, allowing the investor to make an informed and rational decision based on a weighing of the facts, and not a decision based on the emotional rollercoaster of speculative fever.

Railways have been one of Buffetts larger common stock investments. Certainly Buffett came pretty late to the party, but, is there more to come?

The Railway industry, once the premiere investment amongst listed securities. Today almost forgotten by the media. The history of the industry as listed securities extends for over one hundred years. During this time there have been tumultuous changes in the industry. Numerous bankruptcies, reorganizations and business vicissitudes have been hallmarks of the railway industry.

By way of concrete example, Penn Central, was the result of a merger between the “Pennsylvania Railroad” and the “New York Central Railroad” in 1966. Penn Central, by 1970 was itself bankrupt, and eventually reorganized into “Conrail” a government holding company, that was itself bought out by CSX Corp. and the Norfolk & Southern, one of the carriers under analysis.

Yet, through all these travails, the industry has remained vitally important to the American economy and industry. The industry in point of fact was so vital throughout America’s history, that regulation from Federal agencies has been a component of the industry, and remains partly in effect to this day, although, the regulation has started to give way in some instances to free market competition.

The Transport industry, of which the Railways form an important component, while possibly no longer possessing the glamour and excitement of the “GOOG’s” of the investment community, nevertheless provide an essential service to industrial and agricultural America, the same as provided by the “arterial” system to the heart. Yet, the investment community seems to have forgotten about the rail industry.

As investors, what if anything does the Rail industry offer us currently? This question is the one that we shall address. Historically the industry has always required large and regular infusions of new capital. It has been this requirement that has on many occasions led to the over-bonding of individual carriers. It is precisely this tendency within the industry that provides accurate warnings of impending problems with the individual carriers. Thus, the investment quality of both the Bonds and Common can be assessed via an examination of the statistical exhibit regarding interest payments and operating ratios.

The analysis of an individual company is usually carried on against a background of the industry to which it belongs. The future of the individual company usually being assumed to be inextricably linked with the industry. This has not always proven to be true however. The individual carriers have had an ignominious history of bankruptcy, reorganization and consolidation, much of it at the hands of the Federal government. This underlies the over-all importance of the industry, yet the consistent weakness of the individual carriers. It is interesting to note that in Europe, the rail industry has had a long history of “public” ownership via the governments public funding and support.

The overall number of Class 1 railways as defined by the Surface Transport Board (earnings in excess of $250 million) has decreased the number from many, to just a few over the past 100 years. Many of the previous great names are now just memories of stock market and operating history, yet they still exist for the most part in the three major companies.

Taking a short walk down stock market history, we find that the total number of Class 1 Railways has dropped precipitously to the following names; BNSF (Burlington) Canadian National Grand Trunk Western RR, CSX Transportation Inc. Kansas City Southern RR, Norfolk Southern Combined, Soo Line RR and the Union Pacific. Compared to the list existing in the 1930’s………Atlantic Coast Line, Baltimore & Ohio, Canadian Pacific, Chesapeake & Ohio, Chicago & North, Chicago & Great Western, Chicago, Milwaukee, St Paul & Pacific, Chicago, Rock Island & Pacific, Great Northern, Illinois Central, New York Central, New York Chicago & St Louis, Norfolk & Western, Pennsylvania RR, Pere Marquette, Reading Co. St Louis, San Francisco, Union Pacific, and the Wabash and even this list is far from complete.

The long history of the railways, their trials and tribulations form a record that should teach today’s investors the lessons of the past. This lesson being, that no matter how important the over-all industry, to the economic prosperity of the nation, individual carriers have, through a variety of reasons become historical fact, and distant memories. Today’s investors would be prudent to heed the warnings of the past.

The analysis of the company, in its form, will in part be governed by the operating characteristics of the industry. Attention can be given to a myriad of factors, geographical location of markets and plant, to the character of competition, both internal, from other carriers, and external from, air, road and sea, to labor costs, government regulation, or deregulation, and special taxes. All of these components are important, and yet are reflected within the operating results over a period of time.

The Railway industry provides an embarrassment of wealth in regards to statistical information. This allows an analyst reliable quantitative data with which to analyze the business and its operations. There are three ratios which traditionally have been given the most importance or weighting. They are (1) the operating ratio, (2) the coverage of fixed and contingent charges, (3) earnings per share of common and preferred.

In a more detailed analysis, further study is undertaken within the financial and physical areas. Within the financial, further ratios are calculated for the maintenance of way, and equipment, and transport ratios. Within the physical, are calculated “net ton miles per train hour.” These ratios are calculated to examine the causal or correlative factors that result in poor or superior operational ratios. They identify the reasons for the either poor or superior statistical exhibit, via a measurement of costs against revenue, but do not alter the conclusion inferred by the analysis provided by the three traditional ratios.

The purpose of any research or analysis should have a “raison d’etre”. This will be to identify within the securities, opportunities for profitable buying, selling, or switching for the investor who holds, or is contemplating a holding in the securities so examined.

This year alone, the railroads will spend nearly $10 billion to add track, build switchyards and terminals, and open tunnels to handle the coming flood of traffic. Freight rail tonnage will rise nearly 90 percent by 2035, according to the Transportation Department.

In the 1970s, tight federal regulation, cheap truck fuel and a wide-open interstate highway system conspired to cripple the railroad industry, driving many lines into bankruptcy. The nation’s 300,000 miles of rails became a web of slow-moving, poorly maintained lines, so dilapidated in spots that tracks would give way under standing trains.

The Staggers Rail Act of 1980 largely deregulated the industry, leading to a wave of consolidation. More than 40 major lines condensed into the seven that remain, running on 162,000 miles of track.

But the changing global market has fueled prosperity — and the need to add track for the first time in 80 years. Soaring diesel prices and a driver shortage have pushed freight from 18-wheelers back onto the rails. At the same time, China’s unquenchable appetite for coal and the escalating U.S. demand for Chinese goods, means more U.S. rail traffic is heading to ports in the Northwest, on its way to and from the Far East.

Fuel costs certainly make the rails more economic if you are an operator of trains, while currently the truckers are hurting, with all sorts of problems within the industry.

However, the end users, those that actually have to pay the rail freight charges, are far from happy. The railroads’ rate structure has drawn the ire of some of their customers: Nearly 30 antitrust lawsuits have been filed against major railroads in recent months, including one by agri-giant Archer Daniels Midland last month, alleging collusion and price-fixing.

The funding required for this expansion is estimated at $148 Billion, $96 Billion from the rails themselves, the rest from the public purse.

Further, the railroads could not achieve the profits they say Wall Street demands without government subsidies. The railroads seek a tax credit, backed by Sen. Kent Conrad (D-N.D.), that would help them expand further.

More potential problems afflict the rails, the railroad industry’s long-standing antitrust exemption has attracted the attention of lawmakers. They seek to eliminate the exemption and closely examine the rates railroads charge to haul freight

Sen. John D. Rockefeller IV (D-W.Va.), whose state depends on trains carrying coal, introduced a bill last year that the railroad industry derides as the “Reregulation Act.”

The legislation, which has not been scheduled for a floor vote, would allow shippers to easily challenge railroad rates at the Surface Transportation Board, which regulates the rail industry. Now, some shippers say, they have almost no recourse if they think the railroads are gouging them.

It will behoove any investors to keep a close eye on the future legislation coming out that will obviously have far reaching consequences for this industry. Buffett obviously thinks that either it won’t matter, or he already suspects he knows the answer.