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FT on Buffett and Railroads |
HenryTo
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 Posted: Wed Apr 11, 2007 1:15 pm Post subject: FT on Buffett and Railroads |
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FYI: Buffett should find some comfort in the fact that the Financial Times doesnt share the same views as he does. What this article failed to cover is the lack of new road/toll road/highway infrastructure in the United States, as well as the lack of will to improve that structure. Even with liquidity this high, there still has not been a huge amount of projects planned to improve our transportation infrastructure. This should allow railroads to set higher margins at least for the next five to seven years.
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Railways and Buffett
Wednesday April 11, 4:29 am ET
Since the glory days of the 19th century, railroads have rarely offered a safe route to long-term riches. That makes Warren Buffett's decision to buy almost 11 per cent of Burlington Northern Santa Fe (NYSE:BNI) all the more remarkable. After the latest share price jump, his investment in the second largest US railroad operator is worth $3.4bn. That is a big bet and comes alongside smaller investments in other operators.
But Mr Buffett is jumping on an already fast-moving train. Rail companies that carry freight have had a wonderful run, with their shares outperforming the broader market in recent years. Consolidation frenzy has caused the number of large North American carriers to shrink from several dozen to just six by the late 1990s. Moreover, limited geographic overlap means that there are typically only two companies offering freight services within specific regions.
Along with solid demand, that has done wonders for pricing, allowing the sector to earn its cost of capital and more for a change. It is far from clear, however, how long that trend can continue. Railroads already carry more than 40 per cent of US freight, well above their post-war trough and a far higher share than in other developed countries.
Trains are well-suited to carry bulky goods over long distances. At least in the US, that has made them a prime beneficiary of globalisation. They are also more energy-efficient than trucks. That increases their appeal when oil prices are high and should translate into further market share gains once US policymakers get more serious about climate change.
Environmental concerns, however, could ultimately reduce growth rates in coal shipments that investors have pencilled in. And while shipments of grain and coal should prove comparatively resilient during a downturn, railroads are also capital intensive. Historically, that has meant volatile profits. With the sector as a whole trading at more than 15 times earnings, its renaissance could easily get derailed. |
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FT on Buffett and Railroads Replies |
HenryTo
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| Posted: Thu Jul 21, 2011 2:17 am Post subject: |
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Morningstar on CSX's latest earnings:
| Quote: | | CSX delivered yet another outstanding quarter, increasing sales and operating income 13% and 21%, respectively, and improving its operating ratio 190 basis points to an impressive 69.3%. The quarter's results and the trajectory of the past two years' profitability performance confirm that the firm's OR targets (high 60s in 2011, 65% by no later than 2015--unthinkable at any rail but Canadian National CNI just a couple of years ago) may be attainable, not mere bluster. However, these targets are public information, and while the quarter backs management's margin guidance, we had already incorporated OR progress into our valuation model. Still, based on reaching the new OR milestone and beating consensus guidance, we wouldn't be surprised to see the market reward CSX shares with some gain in the near term. We expect to hold steady on our above-market fair value estimate, but will tune our model with the period's results. Clearly, price increases are one of the most sound methods of improving profitability, and during the quarter, CSX expanded revenue per unit 10% overall. We weren't expecting the rail to expand yield by this magnitude, but in fact CSX expanded second-quarter coal, intermodal, and automotive rates by 19%, 15%, and 12% year over year, including fuel surcharges. Volume in coal and automotive sectors declined 3% and 1% from the second quarter of 2010 (the latter due to a tough comparison period and some effects of the natural disaster in Japan), but overall, CSX expanded carloads 3%. First-half volume, yield, and revenue were 5%, 8%, and 13% over prior-year levels. We still consider relatively modest steam coal recovery (somewhat offset by growing international demand for metallurgical coal exports) to be a volume and revenue option at CSX, since demand remains well below past peaks because of cheap natural gas rates and healthy utility coal stockpiles. Also, we consider the recent rate increases announced at less-than-truckload carriers like UPS UPS and Con-way CNW (6.9% on noncontractual business, announced Tuesday) to be solid support for intermodal truck conversions. All in, CSX delivered another excellent quarter, improving same-store sales 7.2% and increasing volume in all but two sectors. We don't expect margin progress to reverse and see the rail continuing to make increasingly efficient use of its hard assets, fuel, and employees. Management is optimistic about both volume and price gains. Further yield gains like those realized in the quarter would imp rove our valuation estimate. |
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rffrydr
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| Posted: Wed Oct 13, 2010 7:48 am Post subject: |
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CSX rocks it (go autos):
http://www.cnbc.com/id/15840232/?video=1614171110&play=1
Hires back most of the furloughs and sets for bigtime capex. Buybacks, dividend increase....as the CEO says, "what's not to like?"
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HenryTo
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| Posted: Wed Jul 01, 2009 9:02 pm Post subject: |
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Morningstar still likes railroads in the longer-run:
http://news.morningstar.com/articlenet/article.aspx?id=296905
| Quote: | Railroads have improved dramatically since the Staggers Rail Act of 1980 partially deregulated the industry. The Staggers Act allowed railroads to abandon or sell unused lines, permitted confidential contracts with customers, enabled rates based on market demand, and enabled the exemption of truck-competitive rail traffic from rate regulation. A spate of large railroad mergers ensued, and Class I rail count dropped from greater than 30 to today's seven. In the two decades following Staggers, rail volume nearly doubled, ton-miles per employee increased from 2 million to nearly 11 million per year, and ton-miles per locomotive increased from 30 million to over 70 million per year. Rail injuries per employee hour and train accidents per train mile plummeted 82% and 73%. Recently, velocities, terminal dwell times, and on-time arrivals and departures reached record levels at most Class I rails. In nearly every measure, it's tough to overstate railroads' progress.
Despite these improvements, deregulation resulted in sharp rate reductions: From 1980 through 2008, average rail rates per ton-mile fell 49% in real (inflation-adjusted) dollars, even including the pricing power rails rediscovered during the past five years. Now that the market is sufficiently concentrated, rational pricing can prevail and railroads refrain from bidding rates down to cost. At this point, each region has just two large players: Canada is served by Canadian National (CNI) and Canadian Pacific (CP); the eastern U.S. by CSX (CSX) and Norfolk Southern (NSC); and the western U.S. by Burlington Northern Santa Fe (BNI) and Union Pacific (UNP). Other public rails include Kansas City Southern (KSU), which operates in the Midwest and derives half its revenue from Mexican operations, and Genesee & Wyoming (GWR), which operates dozens of short lines and other rail operations around the world.
Railroads continue to innovate and improve performance. Wider application of distributed power (locomotives distributed throughout a consist, in both front and rear positions or front, middle, and rear), electronically controlled pneumatic braking, sophisticated route planning software, and locomotive throttle guidance systems will improve efficiency and service in years to come. Via modern AC diesel-electric locomotives, longer trains, and better practices, Class I railroads have improved fuel efficiency 94% since 1980. Today a locomotive hauls one ton of cargo 457 miles per gallon of fuel, on average, according to the Association of American Railroads. Rail fuel economy per ton-mile is nearly quadruple that of trucking and diverting freight to rail even improves truck economy and truck carbon footprint via lower highway crowding. |
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rffrydr
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| Posted: Mon Jun 02, 2008 7:05 am Post subject: |
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One of steel's dirty little secrets. Rail has always maxed out its pricing power. The union power, diesel price, and infrastructural inadequacies remain drags....then there's a recession.
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HenryTo
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| Posted: Sun Jun 01, 2008 1:35 pm Post subject: |
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IHT on the continued pricing power of railroads - as prices of coals and grains increased over the last year. Valuations are steep, however, as forward P/E of 16 is now also at the highest end of its historical P/E range.
http://www.iht.com/articles/2008/06/01/business/01rail.php |
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rffrydr
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| Posted: Wed Apr 11, 2007 8:05 pm Post subject: |
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Yeah, and then there's the coal. That's the emphasis when I posted this two days ago. Burlington has the most to gain from trans-shipments of coal. I think this is Buffet's back door into a "Peak Oil" exposure.
Problem with Rail is Labor. Already experimenting with automated yard locomotives. But they've got "legacy issues" in spades--on Amtrak one "conductor" takes your ticket while another stamps it and hands it back to the first one.
We'll know for sure what Buffet's up to in 15-20 years.
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