Railway Stocks

[Viking]

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 October 9, 2022 by Viking

[Xerxes]

You probably enjoy this discussion. There are lots on railroads. 

[mcliu]

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.

[Dinar]

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.

[Spekulatius]

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.

[ACooke]

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.

[KPO]

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). 

[KPO]

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. 

[Spekulatius]

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 October 10, 2022 by Spekulatius

[dealraker]

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. 

[Spekulatius]

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.

[ICUMD]

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 October 10, 2022 by ICUMD

[crs223]

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.

[ICUMD]

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 October 10, 2022 by ICUMD

[StubbleJumper]

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

[Dinar]

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.

[Spekulatius]

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.

[dealraker]

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 October 10, 2022 by dealraker
clarity

[Whensthepaintdry?]

On 10/9/2022 at 1:26 AM, Viking said:

The reasons to buy railroad stocks is likely stronger today than when Buffett bought BNSF in 2009. 

I have been thinking about this a lot.  Energy transitioning, manufacturing coming back to America, manufacturing south of the boarder increasing, North American oil consolidating further, seems like North America Rails are becoming an even better place to park money. Gates fund, Ackman, TCI all seem to be voting that way. I have always been content with my rail holding through BRK and have admittedly not learned in depth about the space. 

[Jaygo]

I hold CP and CN mostly because of a fascination with railroads, robber barrons and anything 1800's. Personally I hate trucks on the roads, they are unsafe imo and cause alot of the congestion we have. Rails may not provide the best returns but id bet they are one of the only industries that will remain in a similar state 100 years into the future. The companies could change but those rails and need for heavy transport is pretty static if our quality of life is to remain.

 

The one thing id say for the Canadian rails is that i think we will build more lines. Northern canada has few rails (not including tourist lines) and lots of resources. I could see more track getting laid down in the centuries ahead. Think northern Quebec, Yukon, Ring of fire in Ontario ect more lines to Churchill port if it ever goes ahead.

 

[bizaro86]

4 hours ago, Jaygo said:

I hold CP and CN mostly because of a fascination with railroads, robber barrons and anything 1800's. Personally I hate trucks on the roads, they are unsafe imo and cause alot of the congestion we have. Rails may not provide the best returns but id bet they are one of the only industries that will remain in a similar state 100 years into the future. The companies could change but those rails and need for heavy transport is pretty static if our quality of life is to remain.

 

The one thing id say for the Canadian rails is that i think we will build more lines. Northern canada has few rails (not including tourist lines) and lots of resources. I could see more track getting laid down in the centuries ahead. Think northern Quebec, Yukon, Ring of fire in Ontario ect more lines to Churchill port if it ever goes ahead.

 

 

I think it's relatively unlikely Canada has the political will to build new railroads through the wilderness.

[Jaygo]

With the current government who may be considered business neutral to unfriendly we have about 550 billion in ongoing or planned projects for the next 10 years.

Site C, LNG Canada, Wood fibre LNG, TMX, Coastal gas link all in beautiful BC wilderness.

 

If CN has an economic project that is also needed by the local population and major projects I think it would go ahead. There may be overruns and some backlash but at the end of the day the Canadian government knows who butters their bread.

[Jaygo]

https://www.arcgis.com/apps/mapviewer/index.html?webmap=96ec03e4fc8546bd8a864e39a2c3fc41

 

Here is a map of major rail lines in NA. The permafrost in canada is on arch that stretches from midpoint Alaska to around the middle of Hudson's bay or about 2500km north of the bulk of the Canadian lines. Quebec that has abundant natural recourses and seems to have the will to exploit them has barely any rail at all. 

 

I think there is lots of room to grow track miles into Quebec alone. Quebec is almost 3 times the size of the state of Texas.

 

The other amazing thing about this map is just how dominate the rails are. It is truly an oligopoly. From the map I cant help but lean towards the CPKC as the top dog with its stretch into the manufacturing regions of Mexico. Another standout is how the Eastern lines of Norfolk and CSX are so regional vs the big 4. Wonder if they will someday fold into BNSF and UP. 

 

CN announced that they are buying 270+ track miles of the Iowa northern railroad today btw. 

[pricingpower]

Do the Canadian rails trade above a theoretical replacement construction cost?  I thought the costs math on short stretches that have been built in more recent times in the US have been prohibitively expensive even setting the political process issues aside. It seems unlikely meaningful new routes will be created in the US before autonomous vehicles challenge the industry much more.

 

I think part of why Berkshire chose to pursue BNSF instead of their other US rail investments (like NSC) was the western rails have a stronger moat vs trucking in the very long term.   

 

One of the neater niche renewable energy storage techs is using old rail tracks to move heavy things up a hill to store intermittent power as rail is so efficient.