RECENT NEWS
SeekingAlpha  2 hrs ago  Comment 
By Michael Hooper: Most North American railroads will deliver record financial results for third-quarter 2014, while coping with big increases in the movement of grain, oil, autos and intermodal containers. Traffic congestion will continue in...
Forbes  Oct 1  Comment 
In trading on Wednesday, airlines shares were relative laggards, down on the day by about 2.4%.  Helping drag down the group were shares of GOL Linhas (GOL), off about 6.7% and shares of Spirit Airlines (SAVE) off about 4.6% on the day.
Wall Street Journal  Oct 1  Comment 
Oil companies and railroads have united to fight some proposed federal rules on oil-train safety after a year of pointing fingers at each other over explosive accidents.
New York Times  Oct 1  Comment 
The two industries also want three more years to retrofit tank cars manufactured since 2011.
New York Times  Sep 27  Comment 
The owners of Railroads on Parade, which has delighted millions of visitors, are hoping that a wealthy patron will buy the model trains and keep them intact.
SeekingAlpha  Sep 26  Comment 
By Trading Champ: American Railcars Industries, Inc. (NASDAQ:ARII), a leading North American designer and manufacturer of hoppers and tank railcars, has been on a roller coaster for many years because of the volatile nature of its industry. The...
SeekingAlpha  Sep 26  Comment 
By Balanced Investing: The Dow Jones US Railroad Index went up nearly 20% for the year whereas the S&P has only managed to report an 8.5% increase in its value. The recent economic data of the US GDP, retail sales, manufacturing and labor...
Insurance Journal  Sep 25  Comment 
Amtrak filed a lawsuit last week against more than a dozen insurers, claiming that the railroad operator is entitled to recoup additional proceeds for Superstorm Sandy losses from its insurers. “Amtrak has filed a lawsuit against its insurance...
SeekingAlpha  Sep 24  Comment 
By Michael Hooper: Most railroad stocks in North America have been outstanding investments this year, with nearly all beating the performance of the S&P 500 Index. Railroads are the lifeblood of the economy because they move essential products...
SeekingAlpha  Sep 23  Comment 
By Bill Gunderson: The Greenbrier Companies (NYSE:GBX) manufactures rail cars. The company was founded back in 1974 and is headquartered in Lake Oswego, Oregon. It may not be Alibaba (NYSE:BABA), but rail car makers are doing pretty well these...




 
TOP CONTRIBUTORS

At first blush, railroads might look like an ideal investment. They are monopolistic in nature and have ridiculously high barriers to entry thanks to the enormous cost of securing land and building new railroad tracks. Therefore, existing rail companies should capitalize on America’s ever-growing GDP.

However, a quick read of a few of the large railroads’ annual reports will find risk sections chock full of bad stuff. For starters, railroads still face a fair amount of government regulation on rates and business practices (though less than in the past). Next, competition from truckers and shipping companies is intense. Additionally, railroad companies are heavily unionized and face large portions of their workforce retiring in the next decade – and don’t forget ever increasing post-retirement pension and healthcare obligations. There are also sizeable environmental, personal injury, and asbestos-related accrued liabilities on railroad companies’ balance sheets that one never likes to see. Lastly, the capital intensity of a railroad business is very high – this largely eliminates new competition but has ensured rather paltry historical returns on invested capital. Consequently, most large railroads have had to run with significant levels of debt just to deliver relatively sub par returns to equity investors over the years. Railroad companies' shares (prior to the last couple of years) had not created much wealth for their investors in decades.

North American Railroad Industry

Waves of industry consolidation in the rail sector over the years have left seven major public rail companies in the U.S. and Canada

U.S.

Canada


Image:Railroad_co_metrics2.png

Market caps range from $2.5 billion to $30 billion for the largest in the railroad industry, Union Pacific. In comparing companies, a few things stand out. Ignoring smallish KC Southern, which has the worst balance sheet and operating metrics of the group, the biggest six of the North American railroad industry trade for virtually the same trailing and forward P/E multiples, sport around the same dividend yields, and carry similar debt loads in terms of operating income. Canadian National and Burlington lead the capital-intensive industry in terms of returns on invested capital.

Coal Transportation Drives Half of all U.S. Rail Shipments

Coal makes up over half of all U.S. rail shipments, so a decrease in coal demand could harm railroad companies).

Competition

Other Players

  • Railroad operators
  • Railroad parts makers: GE makes engines

Derivative Plays

Hub Group (HUBG) is an asset light intermodal logistics company Wabtec (WAB) makes the brakes used in rails and subway busses in many countries around the world. KMG Chemicals (KMGB) is a small chemical company with 80% of its revenue coming from sales of chemicals used to treat rail road ties

Implication on Other Modes of Transport

The rail industry is competing against other shipping industries. The most prominent competitor is the trucking industry. For many years the price of oil was low and the trucking companies could ship goods for less. If you were running a business and needed to ship goods en masse, you would have searched for the cheapest and most reliable method, and that would have been through trucks. Now, however, oil is breaking through new records and the tables have turned. Trucking, which relies even more heavily on oil prices than rail does, is facing serious cost increases and is forced to pass the increased expenses onto the customer.

Shipping through rail is becoming increasingly attractive for those businesses that need to ship goods within North America. Why? Every dollar that oil goes up hits the trucking industry far harder than it hits the rail shipping industry. Consider this:

A train can ship 1 ton of cargo 400 miles on 1 gallon of diesel, whereas a truck can ship 1 ton of cargo only 125 miles on 1 gallon of diesel. These cases assume that both the train and truck are loaded close to maximum gross weight in all of their attached cars.

This is exactly why Mr. Buffett decided to invest in railroads. He knows the economics of the industry in and out, and knows that businesses are making the switch. Mr. Buffett also knows the increasing usage of biofuels - such as ethanol and biodiesel - are opening up a whole new market for shippers to attract.[1]

Trucking and other forms of transportation might be harmed by increased railroad shipment and benefit from a decrease in railroad use.

Notes

  1. http://feeds.feedburner.com/~r/FreundInvesting/~3/275825317/
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