RECENT NEWS
Wall Street Journal  Oct 9  Comment 
American International Group Inc. said it is expanding its excess casualty liability limits for railroads in the U.S. and Canada in response to demands of North America’s largest rail companies.
Benzinga  Oct 9  Comment 
Below are the top small-cap railroads stocks on the NYSE and the NASDAQ in terms of dividend yield. American Railcar Industries (NASDAQ: ARII) has a dividend yield of 2.40%. American Railcar's shares closed at $65.11 on Wednesday. The...
Reuters  Oct 8  Comment 
The U.S. Surface Transportation Board ruled on Wednesday that all Class 1 railroads must report detailed freight service statistics weekly, a decision that cited months of...
SeekingAlpha  Oct 6  Comment 
By Kevin Quon: Over the past few years, railroad companies have been on a tear as the new oil wealth of North America continues to benefit the internal transportation network. Since 2009, many public railroad companies have more than doubled their...
Cellular News  Oct 6  Comment 
Public transport Wi-Fi provider, Nomad Digital says that it has been selected to provide an on-board Passenger Information solution for the USA's National Railroad Passenger Corporation, Amtrak, covering its national network of inter-city...
Forbes  Oct 3  Comment 
In trading on Friday, airlines shares were relative leaders, up on the day by about 2.7%.  Leading the group were shares of CHC Group (HELI), up about 6.6% and shares of American Airlines Group (AAL) up about 6.3% on the day.
SeekingAlpha  Oct 3  Comment 
By Investor RockieK: The Association of American Railroads releases weekly rail data, usually on Thursdays for the week prior. For the last report of the month, the association also aggregates and reports data for the trailing month. The latest...
Insurance Journal  Oct 2  Comment 
Proposed federal rules to make hauling crude oil by rail safer and avoid fiery wrecks would drive up costs and put the U.S. energy revival at risk, the head of an oil industry trade group said today. The American Petroleum … The article Oil,...
SeekingAlpha  Oct 2  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.




 
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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