Railroads

[LC]

John oliver has done some decent episodes on relevant business/investing topics. 

 

I won't say I always agree with his conclusion or even how he presents the evidence, but I will give him credit for at least giving airtime to topics that nobody else would.

[Eldad]

1 hour ago, LC said:

John oliver has done some decent episodes on relevant business/investing topics. 

 

I won't say I always agree with his conclusion or even how he presents the evidence, but I will give him credit for at least giving airtime to topics that nobody else would.

Let me guess, greedy corporate fat cats are evil and their seeking of more efficient ways of doing things is actually deadly and evil and going to kill us. See Ohio crash. 
 

I’ll skip. 
 

 

[dealraker]

4 hours ago, LC said:

John oliver has done some decent episodes on relevant business/investing topics. 

 

I won't say I always agree with his conclusion or even how he presents the evidence, but I will give him credit for at least giving airtime to topics that nobody else would.

Thanks LC. 

[dealraker]

2 hours ago, Eldad said:

Let me guess, greedy corporate fat cats are evil and their seeking of more efficient ways of doing things is actually deadly and evil and going to kill us. See Ohio crash. 
 

I’ll skip. 
 

 

Somehow my family made well over 100 times their money with Norfolk long before PSR came along.  But what the hell, here's something that will really infuriate you.

 

https://rsexpress.com/precision-scheduled-railroading/

[Eldad]

28 minutes ago, dealraker said:

Somehow my family made well over 100 times their money with Norfolk long before PSR came along.  But what the hell, here's something that will really infuriate you.

 

https://rsexpress.com/precision-scheduled-railroading/

Thank you dealraker. 
 

J Oliver is a biased individual. If he is covering a topic like PSR, I already know what he is going to say is all I meant. 
 

Your article is from the prospective of the railroad client. They are free to use trucks or barges. As a shareholder of BNSF, UNP, and CP I am not so worried about their PSR concerns. If my companies have an advantage I would like them to exploit it to the extent the law and public good faith will allow. 

[dealraker]

51 minutes ago, Eldad said:

Thank you dealraker. 
 

J Oliver is a biased individual. If he is covering a topic like PSR, I already know what he is going to say is all I meant. 
 

Your article is from the prospective of the railroad client. They are free to use trucks or barges. As a shareholder of BNSF, UNP, and CP I am not so worried about their PSR concerns. If my companies have an advantage I would like them to exploit it to the extent the law and public good faith will allow. 

I own all the railroads and owned them as HH passed through most with his game.  A fossil model now, leapfrogged and down the road we go with the repairs needed from this obsession. 

 

I'm a long term investor, I complained when Buffett bought my BNSF and when KSC sold to CP while all others celebrated and bragged.  Same when Prem sold my Hub Brokerage.  Where do you find these long term superior businesses?  Take your cash, pay the cap gain tax, and go shopping for another great business?  Good luck.

 

Same with operating ratio PSR focus.  HH did it to several, the bolted or died.  Problem is the HH model ain't gunna grow sales and as I predicted all the railroad stocks would stagnate in sales and price for years after these OR/PSR obsessions/buyback/cut cap ex/cut employees/cut lines/cut customers garbage all ended.  Yea, some of it was excellent...

 

New era now.  It ain't simple PSR no more if you want a good outcome.  Those days are as dead and burried as any model that ever existed.

Edited January 27 by dealraker

[Eldad]

38 minutes ago, dealraker said:

I own all the railroads and owned them as HH passed through most with his game.  A fossil model now, leapfrogged and down the road we go with the repairs needed from this obsession. 

 

I'm a long term investor, I complained when Buffett bought my BNSF and when KSC sold to CP while all others celebrated and bragged.  Same when Prem sold my Hub Brokerage.  Where do you find these long term superior businesses?  Take your cash, pay the cap gain tax, and go shopping for another great business?  Good luck.

 

Same with operating ratio PSR focus.  HH did it to several, the bolted or died.  Problem is the HH model ain't gunna grow sales and as I predicted all the railroad stocks would stagnate in sales and price for years after these OR/PSR obsessions/buyback/cut cap ex/cut employees/cut lines/cut customers garbage all ended.  Yea, some of it was excellent...

 

New era now.  It ain't simple PSR no more if you want a good outcome.  Those days are as dead and burried as any model that ever existed.

Point taken. I have a lot to learn admittedly. 

[dealraker]

Some action in the rails world:

 

Ancora-Led Group Takes Aim at Norfolk Southern, Pushes to Oust CEO Shaw

Investors have $1 billion stake in railroad operator, plan fight for board control

 

By 

Lauren Thomas

 

 and 

Esther Fung

 

Updated Jan. 31, 2024 7:27 pm ET

 

Norfolk Southern has met with the investor group in recent weeks. PHOTO: GENE J. PUSKAR/ASSOCIATED PRESS

An investor group led by Ancora Holdings has taken a big stake in 

Norfolk Southern NSC -0.68%decrease; red down pointing triangle

 and plans to run a proxy fight aimed at overhauling the railroad operator’s board and replacing its chief executive. 

The group has built a roughly $1 billion stake and nominated a majority slate of directors to Norfolk Southern’s board in a bid to oust Chief Executive Alan Shaw, according to people familiar with the matter.

The director slate includes former Ohio Gov. John Kasich and Sameh Fahmy, who was an executive at railroad Kansas City Southern. 

The idea would be to take control of the board to effect changes aimed at boosting Norfolk Southern stock, which is down by about one-quarter from a high two years ago as revenue and profit fall. Norfolk Southern was the worst-performing stock last year of all the so-called Class 1 railroads that include 

Union Pacific

, 

CSX

 and 

Canadian National Railway

. 

Norfolk Southern has met with the investor group in recent weeks. In those private conversations, the group’s director nominees have zeroed in on a number of issues including how the company handled a big train derailment last year and what they see as Shaw’s failure to hit operating targets. 

 

Separately, hedge funds Sachem Head Capital Management and D.E. Shaw have recently been building their own stakes in Norfolk Southern, some of the people said. The size of those positions couldn’t be determined. 

Norfolk Southern is among the top-five largest railroad operators in North America by revenue. It operates across the eastern U.S. in 22 states and in Washington, D.C. The company’s market capitalization currently stands at roughly $54 billion. 

Norfolk Southern’s fourth-quarter results last week revealed a 19% decline in earnings and a 5% drop in revenue compared with year-earlier levels as railroads grapple with declining demand from lumber and coal suppliers, among others. The company, which has complained of a “stubbornly weak freight market,” said it focused on safety and service for much of 2023 and is aiming to improve productivity this year. 

Ahead of the report, the railroad operator told employees that it planned to lay off 7% of its nonunion workforce, including management and administrative staff, according to a memo viewed by The Wall Street Journal. 

“The overall macroeconomic environment and prolonged weak freight market has limited the amount of business we can attract, and our cost structure is too high for our top line,” CEO Shaw said in the memo. 

The dismal earnings report led multiple research analysts to downgrade the stock. 

“Norfolk has long been an underperforming self-help story that simply can’t figure out how to help themselves,” 

Stifel

 analysts wrote in a research note. 

The company’s stock fell after a toxic train derailment in East Palestine, Ohio, resulted in damaged cargo, fires and chemical releases across the area roughly a year ago. The accident led to scrutiny of Norfolk Southern’s safety practices, with costs associated with the derailment eclipsing $1 billion. 

---

NEWSLETTER SIGN-UP

What’s News

Catch up on the headlines, understand the news and make better decisions, free in your inbox daily. Enjoy a free article in every edition.

Preview

 

 

 

 

Subscribe

---

Shaw, a Norfolk Southern employee since 1994, became CEO in 2022 and has faced a slew of challenges during his tenure. Bruising negotiations between unions and freight railroads in 2022 led President Biden to intervene to prevent a potentially damaging strike. 

Other hurdles for Norfolk Southern have included disruption because of extreme weather and supply-chain congestion. 

Norfolk Southern isn’t the only railroad to face shareholder pressure for change. 

Union Pacific, the largest freight-railroad operator in the U.S., last year named Jim Vena chief executive after a major shareholder urged the company’s board to oust Lance Fritz from the job. Union Pacific also announced staff cuts to put a lid on operating costs. 

Cleveland-based Ancora has nearly $9 billion in assets under management. Last year, the firm was successful in winning board seats at packaging supplier Berry Global and vehicle marketplace RB Global. It also played a key role in installing Tom Kingsbury as CEO at retailer 

Kohl’s

, succeeding Michelle Gass after a deal to sell the business was scrapped. 

This time of year is typically when more proxy campaigns are launched and activists kick into high gear, as many companies’ windows for shareholder nominations open up ahead of annual meetings to be held in the spring. 

Disney

 is in the midst of a boardroom battle with Nelson Peltz’s Trian Fund Management and Blackwells Capital. 

 

[Dinar]

I am sorry, but I do not get the attraction.  Let's assume normalized revenues = $14bn, let's assume that (EBITDA - cap ex) / sales can = 40%, which would imply a 50% operating ratio, I doubt that the company can achieve it but let me dream... Then, let's assume annual EBITDA - cap ex can grow at 1% + inflation per annum purely driven by pricing, then, using a real r = 6%, value: 20 * 14bn * 0.4 = $112bn before debt and tax, or $100bn post debt and $75bn post tax, using 226mM s/o, that is $331 per share.

 

What am I missing?  @dealraker?

[dealraker]

26 minutes ago, Dinar said:

I am sorry, but I do not get the attraction.  Let's assume normalized revenues = $14bn, let's assume that (EBITDA - cap ex) / sales can = 40%, which would imply a 50% operating ratio, I doubt that the company can achieve it but let me dream... Then, let's assume annual EBITDA - cap ex can grow at 1% + inflation per annum purely driven by pricing, then, using a real r = 6%, value: 20 * 14bn * 0.4 = $112bn before debt and tax, or $100bn post debt and $75bn post tax, using 226mM s/o, that is $331 per share.

 

What am I missing?  @dealraker?

Ha!  Not too impressed with anything about NSC for a log time.

[Saluki]

14 hours ago, Dinar said:

I am sorry, but I do not get the attraction.  Let's assume normalized revenues = $14bn, let's assume that (EBITDA - cap ex) / sales can = 40%, which would imply a 50% operating ratio, I doubt that the company can achieve it but let me dream... Then, let's assume annual EBITDA - cap ex can grow at 1% + inflation per annum purely driven by pricing, then, using a real r = 6%, value: 20 * 14bn * 0.4 = $112bn before debt and tax, or $100bn post debt and $75bn post tax, using 226mM s/o, that is $331 per share.

 

What am I missing?  @dealraker?

 

If you start from the risk of a zero and work backwards, RRs look interesting. Other than ships, there is no cheaper way to move freight. So for large amounts of land based freight over long distances, they are the best option.  They are also somewhat monopolies since many of them have merged and some overlap in a few areas, but some have large portions all to themselves. The risk of a new competitor is almost zero because the RRs were built on land grants and rights of way that you wouldn't be able to get now. 

 

Advances in technology will allow longer cars and fewer people to operate the trains which should help profitability in addition to growth along with the economy.  And in an inflationary economy, most of the big capex was paid for in past dollars but the revenue comes back in future dollars which improves your ROI.  

 

There is also a potential to monetize all that land and track in ways that are not apparent yet, but may become valuable in the future.  For example, when I was a young energy/telecom attorney, Williams Companies in Oklahoma made a bunch of money from old natural gas pipes that were not being used and not even in good shape. During the fiber boom, they allowed telecom companies to run miles and miles of fiber through those empty pipes.  The telecom companies didn't have to get rights of way, or spend a fortune to dig up roads to bury the wires.  Win/Win.  Those rails go east/west and north/south across the entire US, Canada and sometimes Mexico.  Sometime someone is going to figure out a way to make money off that in a way that doesn't involve trains. 

[coffeecaninvestor]

It’s been awhile since any railroad discussions have come up. Any thoughts on them here? CP and CNI look interesting. I own CNI might add some more. It’s been hit by a ton of downgrades despite September volumes and price seeming to be increasing. 

[Saluki]

1 hour ago, coffeecaninvestor said:

It’s been awhile since any railroad discussions have come up. Any thoughts on them here? CP and CNI look interesting. I own CNI might add some more. It’s been hit by a ton of downgrades despite September volumes and price seeming to be increasing. 

Because I'm a masochist, and because I'm always looking for evidence that the trading curse has been broken, I looked at what happened to a company that I put in the "too hard" pile.  According to Yahoo, it's up 200% in the past 6 months 

 

Somewhere, in a time long forgotten, I'm convinced one of my ancestors did something to get on the sh1t list of the village witch back in the old country, and this trading curse is working it's dark magic long after the offense has been forgotten. 

[Dinar]

I actually bought CP today.

[coffeecaninvestor]

I think the Canadian rail roads are attractive. CNI has really ramped up the buy back over the past few years. 
It will be interesting to see how the CP/KC merger plans integration plays out. I haven’t followed it too closely but I should start. 

 

 

 

[Spekulatius]

5 hours ago, Saluki said:

Because I'm a masochist, and because I'm always looking for evidence that the trading curse has been broken, I looked at what happened to a company that I put in the "too hard" pile.  According to Yahoo, it's up 200% in the past 6 months 

 

Somewhere, in a time long forgotten, I'm convinced one of my ancestors did something to get on the sh1t list of the village witch back in the old country, and this trading curse is working it's dark magic long after the offense has been forgotten. 

Just make sure you put all your buys and sells in the CoBF threads here for that purpose. We will take it from there.

[dealraker]

The sell-off today in the railroads, led by the first to report CSX, is precisely what ole dealraker has been hammering home for several years now.  The low-lower-lowest OR isn't a longevity profit model, it has run 90% if not more of its potential.

 

Back a few years ago I debated with the Norfolk crowd, the $300 price of the stock was cheap they said.  OR ratio?  Oh it was the obsession.  "Mine's better than yours" was the theme, like 5th graders in the bathroom trading baseball cards, envy of "who's better" filled the room.

 

The rails gotta be thinking full blown business model to thrive now.  Simply preventing employees from taking time off for a funeral ain't gunna make the CEO's next quarter like it once did.

 

Life is great...if you can stand it.

[rogermunibond]

Isn't the real issue with most NA rail the lack of volume growth?  They've had to deal with huge decline in PRB and thermal coal.  Container, commodity, not growing.

[dealraker]

16 minutes ago, rogermunibond said:

Isn't the real issue with most NA rail the lack of volume growth?  They've had to deal with huge decline in PRB and thermal coal.  Container, commodity, not growing.

Of course.  No surprises here.  Some sound articles in my railroad publications as to overall business models and how the railroads can gain market share along with improving their status in the minds of customers.  Given some amount of decent relationships the RR's should thrive soon.

[Whensthepaintdry?]

Anyone know why a trump victory would take CP down?

[sleepydragon]

5 minutes ago, Whensthepaintdry? said:

Anyone know why a trump victory would take CP down?

Mexican trade war?

[rogermunibond]

Yeah trade - tariffs and cutting off Chinese goods moving through Mexico.

 

UNP is up.

[dealraker]

Over time, especially the last 3-4 years, I pretty much quit bringing up any discussion of the railroads as it always...and I mean always...went straight down the rabbit hole of operating ratio as being the one, and the only, thing that could or would ever matter.  In my view those were simply terrible discussions, so dated, and so out-of-touch with the major screaming in your face issues that were far more important for future returns as far as us investors are concerned.

 

This article gets more into the new era for the rails, long after the OR's have been run down, there more depth to the issues of the industry as far as we investors getting a return down the road somewhere.  The last sentence should be read by those who never stop ranting that UNP is far better run than BNSF.  

 

https://www.freightwaves.com/news/railroads-have-turned-the-corner-on-service-and-resiliency-analysts-say

Edited November 19 by dealraker

[pricingpower]

I was just thinking the other day how it's odd that forest fire liability risk has been likely massively growing for rails over the last decade but never gets talked about outside of a utilities context.  One structural advantage trucking is going to grow is that no one will be able to extract a $50bn settlement for starting a forest fire while deep pocketed rails are probably increasingly exposed... 

[rogermunibond]

CP and CSX Mexico to Southeast intermodal is ready to go December 1

 

https://theloadstar.com/us-and-mexico-intermodal-traffic-surge-too-much-for-railways-to-swallow/

 

CP is losing some of its premium to US Class I rails due to fears of Mexico/China tariffs.  Long term say 4 years out even with tariffs I wouldn't be overly worried.