Railroads

[DooDiligence]

32 minutes ago, pricingpower said:

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... 

 

One time payouts vs being pecked to death.

 

[dealraker]

So today I thought I'd just mention that my railroad stocks are again roaring to the upside given the super-duper economy - as of course the economy was absolutely terrible a month ago.  But anyway I own all the rails, all the US for somewhere between 30-some and almost 50 years (NSC).  I thought I'd share something, given the OR obsessions and whatnot.  Now I'm going on memory here so bear with me (cause I'm old and have no memory):
 

UNP sales growth for the last ten years in total?  Wanna bet?  My bet is about zero.  Am I right?
NSC sales growth for the last ten years total?  Hmm...I'll wager mid single digits.

CSX sales growth for the last ten years total?  Hmm...last I saw it was maybe very low double digits.

 

Just making sure everyone's got somewhat of an off-Wall Street view from an owner.  Unlike 99% of investors old dealraker doesn't mind at all discussing the reality of his stuff while most endlessly chant euphoria till the day their stuff is sold- then it is bombs away.  I know, I know...they laid off unprofitable sales or whatever.  Profits per share are up of course in the last 10 by a pretty good bit.

 

Oh...and debt growth for the last ten?  Seems there were some buybacks using debt along the way.  I guess "sales-to-debt" isn't a normal financial metric sold to shareholders.

 

Hoping for the best of course.

 

 

[rogermunibond]

CP still trading at a premium to NA rail but for how long?  Use the sell off as a buying point.

 

https://www.wsj.com/business/logistics/the-railroad-on-the-wrong-side-of-trumps-tariffs-51d1a1bc?mod=hp_lead_pos10

[dealraker]

coffeecaninvestor mentioned the railroads on another topic and alluded to a post I had just made recently as to RR sales of the last ten years.  I'm actually a tad more upbeat on the railroads than that post may have presented.

 

So basically the rails have been left out of the most recent years run-up of the markets, and they should have been left out.  Norfolk had the disaster thing going and the stock of course temporarily tanked, but for the most part all of the RR's have just been spinning in neutral for a while.  I'd think that will change, if and when there's more stuff on  track to be shipped.  All of the RR's are equipped to run hot should it - the stuff that needs to be RR shipped - come.

 

So in that respect I do think the industry is in good condition and ready.  Valuations are appropriate, not high or low in my limited opinion.  So over time I think the RR's to be a decent place to invest.

 

 

[coffeecaninvestor]

Thoughts on the Canadian rails? I was pretty focused on CNI since I owned it. They seem to be in a tougher situation with the new administration and trading at a premium to US rails. If on shoring continues I could a see a more favorable return from US rails. 

[dealraker]

On 12/5/2024 at 10:23 AM, coffeecaninvestor said:

Thoughts on the Canadian rails? I was pretty focused on CNI since I owned it. They seem to be in a tougher situation with the new administration and trading at a premium to US rails. If on shoring continues I could a see a more favorable return from US rails. 

It is going to be interesting to see what the Canadian rails deal with as to the DJT administration.  While I own them all and don't consider the stock prices crazy high I'm still not aware of what's coming along to give them more volume and sales growth outside of inflation pricing.

 

I bought NSC averaging in around a bit below $200 during the East Palestine tragedy but as of yet I've seen no other stock prices I'd be tempted with given what seems - at least to me - to be little coming along to up their game.  NSC will get their OR down some from where it is now but that's already in the stock price it seems to me.

 

That said, I'm an long term owner but I'm not an expert of the cycles and trends that make would help make a good timed buy.  

[Dinar]

24 minutes ago, dealraker said:

It is going to be interesting to see what the Canadian rails deal with as to the DJT administration.  While I own them all and don't consider the stock prices crazy high I'm still not aware of what's coming along to give them more volume and sales growth outside of inflation pricing.

 

I bought NSC averaging in around a bit below $200 during the East Palestine tragedy but as of yet I've seen no other stock prices I'd be tempted with given what seems - at least to me - to be little coming along to up their game.  NSC will get their OR down some from where it is now but that's already in the stock price it seems to me.

 

That said, I'm an long term owner but I'm not an expert of the cycles and trends that make would help make a good timed buy.  

Charlie, CP claimed in its 2023 investor day that they would be able to squeeze out USD 5bn in revenue synergies from the merger thanks to higher volumes.  I would guess that these volumes would come at 70% EBIT margin, vs 40-45% for the pre-merger business.  There were also obviously cost synergies which they tried to downplay (CEO, CFO, CTO, COO, board of directors, treasurer, and hundreds of other corporate staff.  I think the KCS board + executives consumed $20MM per annum.)  They are finishing the 2nd bridge at Laredo which should cut 6 hours from the train journey from/to Mexico one way, so 12 hours round trip - massive savings.  

I am getting to a 9%+ free cash flow yield to the equity in 2028, assuming maintenance cap ex is CAD 900MM higher per annum than D&A.  

[Spekulatius]

On CP- 20% incremental revenue growth and 70% incremental EBITDA margins seem high. Right now they are scratching 40% EBITDA margins and it takes a one hell of a business to go higher than that.

 

CP is a quintessential play on NAFTA:

 

[Dinar]

3 hours ago, Spekulatius said:

On CP- 20% incremental revenue growth and 70% incremental EBITDA margins seem high. Right now they are scratching 40% EBITDA margins and it takes a one hell of a business to go higher than that.

 

CP is a quintessential play on NAFTA:

 

a) It is not a 40% EBITDA margin, it is a 40% EBIT margin (albeit overstated since D&A is less than maintenance cap ex)

b) Historically CP was in the mid 40s EBIT margin and KCS was in the 80s.  It was widely acknowledged that material operating improvements could be made at KCS.  

c) Incremental volumes are extraordinarily profitable.  Look historically at any railroad, how say a 5% volume increase impacted profits.

d) Yes, it is a NAFTA play.  

[dealraker]

Most railroad discussions are stuck in the past, they discuss operating ratios and HH.  Here we go, slowing getting up from the Rip Van Winkle to what has been the New New Thing for a while.  Very simple and obvious place to start right here.  And unrelated to this article....yes the CP thing does seem to make sense to me.

 

https://www.trains.com/trn/news-reviews/news-wire/carload-considerations-will-pricing-above-inflation-work-indefinitely/

 

 

[Spekulatius]

I wonder about the math to 9% FCF with CP in 2028, way above consensus.

 

Raising prices above inflation won’t work forever either. I think self driving trucks will be a thing and quite deflationary on Transportation costs and that will affect RR’s too. FCF yield for most RR’s seems to be below 4% which seems rich.