RECENT NEWS
Insurance Journal  12 hrs ago  Comment 
Federal regulators ordered Amtrak, the U.S. passenger rail service, to immediately improve safety on its Northeast Corridor route from Washington to Boston. Amtrak must expand the use of technology to control train speeds, the Federal Railroad...
New York Times  May 18  Comment 
The authorities in the southwestern Chinese province of Sichuan said on Monday that plans for a regional rail line were still under discussion after thousands of people protested over reports that the line would bypass their city.
MarketWatch  May 17  Comment 
Amtrak said late Sunday it plans to resume regular rail service between New York and Philadelphia, beginning Monday at 5:30 a.m. Eastern time. "Our infrastructure repairs have been made with the utmost care and emphasis on infrastructure...
MarketWatch  May 16  Comment 
The Federal Railroad Administration has ordered Amtrak to modify its existing signal system to protect against speeding at multiple sharp curves along the Northeast Corridor, including the one where a train derailed Tuesday, killing eight...
New York Times  May 16  Comment 
The Federal Railroad Administration said it had ordered the railroad to make more use of technology that can automatically stop speeding trains.
Yahoo  May 15  Comment 
As federal investigators try to find out why an Amtrak train that crashed in Philadelphia sped up in the last minute before it derailed, the railroad's top official said it takes full responsibility for ...
New York Times  May 15  Comment 
The railroad said technical and regulatory roadblocks had delayed operation of the system, which might have prevented this week’s train derailment.
New York Times  May 14  Comment 
The railroad said technical and regulatory roadblocks had delayed operation of the system, which might have prevented this week’s train derailment.
NPR  May 14  Comment 
The Amtrak passenger train was going more than 100 miles per hour when it derailed north of Philadelphia. Positive train control could have automatically slowed the train down on that stretch of rail.




 
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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