RECENT NEWS
Motley Fool  Aug 30  Comment 
Here's what could power Union Pacific's stock in the years ahead.
Motley Fool  Aug 29  Comment 
Norfolk Southern's earnings report helped send the stock to new heights, and investors are getting even more optimistic about the railroad's future potential.
SeekingAlpha  Aug 28  Comment 
By Divhut: Investing In Railroad Dividend Stocks A couple days ago I wrote an article highlighting the railcar industry and several dividend stocks worth considering in that sector. Many of the railcar stocks are experiencing back orders for...
Insurance Journal  Aug 27  Comment 
As scientists investigate whether injection wells where the booming oil and gas industry disposes of wastewater cause earthquakes, the Texas agency that oversees oil and gas is proposing a regulatory overhaul. The Texas Railroad Commission is...
OilVoice  Aug 26  Comment 
About 400000 carloads of crude oil traveled by rail last year to the nationrsquos refineries up from 9500 in 2008 according to the Association of American Railroads. A series of recent accident
SeekingAlpha  Aug 26  Comment 
By Divhut: Investing In Railcar Dividend Stocks The railroad and railcar industry has a long rich history in North America. Though often thought of as a legacy industry, they are still very important to the modern economy. In fact, the rail...
New York Times  Aug 23  Comment 
He amassed evidence that American troops had systematically killed more than 100, and possibly as many as 400, civilian refugees early in the Korean War near a railroad bridge.
Insurance Journal  Aug 22  Comment 
An important highway in northeast Arkansas could stay closed into next week as crews clean up the wreckage left from a head-on train collision, a highway official said. Two railroad workers were killed and two others were injured when the...
SeekingAlpha  Aug 22  Comment 
By Balanced Investing: According to the American Association of Railroads "AAR", railroads stand alone make up to 40% of the intercity freight volume. Apart from being the most popular mode of freight transportation, it is also an efficient and...




 
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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