RECENT NEWS
MarketWatch  Feb 15  Comment 
CSX Corp. turned the tables on an activist investor that threatened a fight for control of the railroad operator’s board, revealing the investor’s demands and calling for its shareholder to vote on the matter.
Wall Street Journal  Feb 10  Comment 
CSX pushed off a board fight with an activist investor, buying more time to reach an agreement to install railroad veteran Hunter Harrison as its chief executive.
Wall Street Journal  Feb 9  Comment 
Railroading veteran Hunter Harrison has turned around Canada’s two biggest freight carriers with tighter schedules and rigorous cost discipline. But his operating philosophy could face its toughest test in the crowded Eastern U.S. rail network.
Insurance Journal  Feb 3  Comment 
The lasting effects of Superstorm Sandy continue to wash across New Jersey, evident on a century-old railroad bridge that nearly became a casualty of the ferocious October 2012 onslaught. The storm surge from the Atlantic Ocean up into the Raritan...
Insurance Journal  Feb 2  Comment 
The Amtrak engineer involved in a deadly 2015 crash in Philadelphia, Pennsylvania, has sued the railroad, saying it failed to address reports that people were throwing projectiles at trains. Brandon Bostian, 33, said he was left disoriented or...
Insurance Journal  Jan 27  Comment 
New Jersey Transit faces a widening examination of its safety practices after federal regulators discovered hundreds of potential work-hour violations, including altered duty logs and shifts longer than permitted. Federal Railroad Administration...
DailyFinance  Jan 25  Comment 
Filed under: News, US, Transportation By Nathan Rousseau Smith, Buzz60 A heart-stopping moment was caught on camera in a video that shows a FedEx semi struggling to maintain control under Utah's fierce weather. The tractor-truck slowly starts...
Forbes  Jan 23  Comment 
About every three hours, a person or vehicle is hit by a train in the United States. Last year alone, 232 people died in railroad crossing crashes. Those stark facts have prompted the Transportation Department to launch a new safety ad campaign to...
Wall Street Journal  Jan 19  Comment 
Hunter Harrison has spent several years trying to assemble a transcontinental railroad empire. This week the 72-year-old maverick set aside that pursuit but not his desire to run one of America’s biggest railroads.




 
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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