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Railway Stocks


Viking
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During the GFC, Warren Buffet’s big purchase was a railroad stock. The reasons to buy railroad stocks is likely stronger today than when Buffett bought BNSF in 2009. 

1.) railroads have a strong moat - i think we can safely say another railroad will never get built.

2.) railroads offer growth: US economy looks strongest of all major global economies; in 2009 it was the weakest by far. With deglobalization and cheap energy the future of the US economy looks brighter than major competitors.

3.) railroads are profitable - putting more business over an existing fixed cost infrastructure is good for profitability (revenue increases faster than costs).

- Oligopoly helps: with Buffett now owning one of the major players, likely we will see continued focus on profitability not market share. Very important in an inflationary environment = pricing power. 

4.) ESG approved: railroads are one of the most fuel-efficient means of transporting freight by land.

- if oil prices stay high (or go higher) it will keep fuel prices elevated hurting the competitiveness of trucking

5.) stocks are available at a fair price.

 

Is the debt burden a big problem in a higher interest rate environment?

 

Living in Canada, i am looking at CN and CP. US based companies also look interesting. Does anyone have a strong opinion of who the top one or two operators are? Of course perhaps the easy decision is to simply buy Berkshire Hathaway.
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Investing in Railroad Stocks

A guide to the businesses that keep America rolling.

https://www.fool.com/investing/stock-market/market-sectors/industrials/transportation-stocks/railroad-stocks/

 

Edited by Viking
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I think rail is a great business but returns will not be as good as the last two decade because

1) starting valuation was low as market under-appreciated the efficiency gains from PSR

2) further gains from PSR has slowed as it becomes industry standards

3) current multiples are much higher and you won't get additional returns from multiple expansion.

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I own CP & CN.  CN had the best network in NA before CP bought KSU.  I am very bullish for the reasons Viking mentioned & I found the interview with Mandelblatt to be very interesting.  I think Mexico and US manufacturing will be major beneficiaries of re-shoring, and CP & CNI will benefit. I also think that CP lowballed the synergies associated with KSU acquisitions and I think that technology and automous trains will help drastically cut costs.

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Self driving trucks would shift the moat away from Railroads to trucking. I think self driving trucking on Highways is a solvable problem in the not too distant future. It’s  possible that truck drive themselves on highways and then park on exits and drivers will assist with the last few miles.

This won’t take away the energy use advantage of railroads but it will take labor out of trucking. This is probably inevitable because we won’t have enough truckers 10-20 years from now otherwise.

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7 hours ago, Spekulatius said:

Self driving trucks would shift the moat away from Railroads to trucking. I think self driving trucking on Highways is a solvable problem in the not too distant future. It’s  possible that truck drive themselves on highways and then park on exits and drivers will assist with the last few miles.

 

Doesn't this defeat the purpose and make a train more viable (assuming a depot is nearby)?

If you're having to meet a truck somewhere for a driver to take over wouldn't it be cheaper to just throw it on a big, long, more efficient truck (a train) and unload/reload at the depot? Sure the unload/reload certainly adds drag but without actually crunching numbers - it it seems like you're better off once you factor in much higher maintenance costs for a truck, insurance etc. - plus, do you now have to set up a bunch of facilities periodically along a highway as meeting/pick up points - I'm sure you can't just start lining trucks up on highway breakdown lanes?

 

Also, unless we sort out how to fuel these things with something more "green" than the utopian mirage that is the current EV battery, it seems counter intuitive to the whole climate change song and dance.

 

I agree in that self driving trucks etc. are an inevitability but I don't think we're even close. I think it's 15+ years off, although I have zero basis for that opinion.

 

The old quote about things happening extremely slowly and then all at once seems to spring to mind here.

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9 hours ago, Dinar said:

I own CP & CN.  CN had the best network in NA before CP bought KSU.  I am very bullish for the reasons Viking mentioned & I found the interview with Mandelblatt to be very interesting.  I think Mexico and US manufacturing will be major beneficiaries of re-shoring, and CP & CNI will benefit. I also think that CP lowballed the synergies associated with KSU acquisitions and I think that technology and automous trains will help drastically cut costs.

One option that allows you to participate in two secular trends (near shoring & EVs) that trades at a large NAV discount is Grupo Mexico. They own the largest railroad in Mexico, a couple short line railroads in the US (TX & FL), ~90% of Southern Copper, and some other copper (US) and energy assets (mostly in Mexico). 

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4 minutes ago, ACooke said:

 

Doesn't this defeat the purpose and make a train more viable (assuming a depot is nearby)?

If you're having to meet a truck somewhere for a driver to take over wouldn't it be cheaper to just throw it on a big, long, more efficient truck (a train) and unload/reload at the depot? Sure the unload/reload certainly adds drag but without actually crunching numbers - it it seems like you're better off once you factor in much higher maintenance costs for a truck, insurance etc. - plus, do you now have to set up a bunch of facilities periodically along a highway as meeting/pick up points - I'm sure you can't just start lining trucks up on highway breakdown lanes?

 

Also, unless we sort out how to fuel these things with something more "green" than the utopian mirage that is the current EV battery, it seems counter intuitive to the whole climate change song and dance.

 

I agree in that self driving trucks etc. are an inevitability but I don't think we're even close. I think it's 15+ years off, although I have zero basis for that opinion.

 

The old quote about things happening extremely slowly and then all at once seems to spring to mind here.

This and the US highway system couldn’t support the additional load, wear and tear, etc. 

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12 hours ago, ACooke said:

 

Doesn't this defeat the purpose and make a train more viable (assuming a depot is nearby)?

If you're having to meet a truck somewhere for a driver to take over wouldn't it be cheaper to just throw it on a big, long, more efficient truck (a train) and unload/reload at the depot? Sure the unload/reload certainly adds drag but without actually crunching numbers - it it seems like you're better off once you factor in much higher maintenance costs for a truck, insurance etc. - plus, do you now have to set up a bunch of facilities periodically along a highway as meeting/pick up points - I'm sure you can't just start lining trucks up on highway breakdown lanes?

 

Also, unless we sort out how to fuel these things with something more "green" than the utopian mirage that is the current EV battery, it seems counter intuitive to the whole climate change song and dance.

 

I agree in that self driving trucks etc. are an inevitability but I don't think we're even close. I think it's 15+ years off, although I have zero basis for that opinion.

 

The old quote about things happening extremely slowly and then all at once seems to spring to mind here.

Self driving and electric have very little to do with each other. the problem with RR is that it’s slow and loads needed to go on a truck for the last leg.


I could see a hub model for cities where trucks arrive form the longer HSY stretch’s and drives do the last mile thing and drive them to their destination. a self driving on a highway isn’t far off, even consumer cars do a pretty good job with driving assist now on highways.
Driving trucks in any road is going to be way harder and that’s why I think highway self driving will come way before self driving in general and it will benefit trucking more than railroads.

Edited by Spekulatius
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So given I'd inherited a tad of NSC back in 1975 I have spent some time whining like a stuck pig about NSC and the others buying more stock back at ever higher multiples.  So now we are down 100 points at NSC and the same pecentage at the rest and you'll see buybacks stop.  Analysts of some brokerages will end their ever higher price targets and drop coverage.

 

The cycles continue and buyback models, or lack thereof, work out as usual.  But railroads, that is the stock prices, will likely once again go from obviously too high to being likely too low.  

 

The future vs trucking?  I'm in the boat of saying we are all just doing wild guesses.  I'm basically of the opinion that our obsession with tax avoidance and huge budget deficits - minimal road infrastructure upgrades - means those rail corridors are going to get used. 

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Railroads are not going away. For bulk goods, it is really hard to beat railroads. However I can see the relative competitiveness of trucking improving for if self driving trucks becomes possible, even if it’s on highways only. I have been loosely following the big truck companies in this area and I think we might get self driving trucking way before self driving cars. When speed and door to door handling matters, then trucking is much better than rails.

 

Now self driving trains is possible too, but the relative benefit of a self driving train would be much smaller than for a self driving truck as far as unit costs are concerned. These are all long term trends so I would not sell rail stocks over this, if I owned any. However, it would be a trend that I would start to watch. I am mainly interested in this because I think the truck manufacturers like Paccar, Daimler Truck etc could add enormous value to their customers, if self driving trucking is solved.

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I hold both CN and CP. 

 

I think they have better prospects with electrification than trucking. Batteries/motors + low rolling resistance give very high efficiency.  Battery weight is better handled steel on steel than rubber on asphalt. 

 

Last mile will always be trucking. 

 

Rail is basically a set it and forget it in my portfolio.

Edited by ICUMD
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Trains are already “electrified”.  They use diesel to run a generator to power the electric motors.  Electric motors have full torque at zero MPH.  Imagine putting a clutch on a train!

 

But battery powered trains?  Those batteries are so heavy — how many pounds of batteries would you need to move a train 1,000 miles?

 

Seems to me if you wanted to eliminate the diesel, easiest way would be to string power lines above the tracks.

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30 minutes ago, crs223 said:

Trains are already “electrified”.  They use diesel to run a generator to power the electric motors.  Electric motors have full torque at zero MPH.  Imagine putting a clutch on a train!

 

But battery powered trains?  Those batteries are so heavy — how many pounds of batteries would you need to move a train 1,000 miles?

 

Seems to me if you wanted to eliminate the diesel, easiest way would be to string power lines above the tracks.

Some places have been experimenting with roads that recharge batteries with induction. 

 

I surmise this may be easier along railway tracks via a charging electrode/brush of some sort without having to stop the train. Could probably get away with much smaller batteries and avoid diesel altogether.

 

Could also 'hook up' charged battery cars as needed.

 

Lots of options here.

 

But I'll leave these solutions to the engineers. 

 

Edit: already in the works

 

https://www.cbc.ca/news/science/freight-rail-electric-locomotives-1.6440766

 

Edited by ICUMD
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14 hours ago, KPO said:

This and the US highway system couldn’t support the additional load, wear and tear, etc. 

 

True if you are thinking about it in terms of our existing trucking system with its 40-ton trucks.  The heavy trucks currently beat the hell out of the highway system.  But, if you enter the imaginary world of self-driven trucks, you no longer need to have 40 tons of freight in an attempt to push down the cost of labour per ton-mile.  For heavy freight, you could just as easily have twice as many trucks at 20 tons each, which would considerably reduce the wear and tear on the road.  What is more, by imposing a congestion charge on trucks in the heavily congested areas of the country, the states could effectively push most of the truck traffic into the 8pm to 4am time frame when there's nobody on the road.

 

But, all of this is decades in the future if it ever happens...

 

 

SJ

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I remember 35-40 years ago that most trains in the former USSR were electrified, with the electric cables strung above tracks.    So I presume it can be done if it becomes cost effective.

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4 hours ago, Dinar said:

I remember 35-40 years ago that most trains in the former USSR were electrified, with the electric cables strung above tracks.    So I presume it can be done if it becomes cost effective.

LOL. Virtually any train line in Europe is electrified. This is really nothing new.

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6 hours ago, StubbleJumper said:

 

True if you are thinking about it in terms of our existing trucking system with its 40-ton trucks.  The heavy trucks currently beat the hell out of the highway system.  But, if you enter the imaginary world of self-driven trucks, you no longer need to have 40 tons of freight in an attempt to push down the cost of labour per ton-mile.  For heavy freight, you could just as easily have twice as many trucks at 20 tons each, which would considerably reduce the wear and tear on the road.  What is more, by imposing a congestion charge on trucks in the heavily congested areas of the country, the states could effectively push most of the truck traffic into the 8pm to 4am time frame when there's nobody on the road.

 

But, all of this is decades in the future if it ever happens...

 

 

SJ

I tried to word such a post but failed, nice go at it.  SJ it may be one of those "who gets the benefit of better economics...the business/customer or the government/taxpayer/etc."?   

Edited by dealraker
clarity
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