Railroads

[rogermunibond]

Agree on CP and CNI.  Still waiting for them to get as low the December dip from Can/Mex tariff fears.

[Spekulatius]

8 hours ago, rogermunibond said:

Agree on CP and CNI.  Still waiting for them to get as low the December dip from Can/Mex tariff fears.

They both should be lower now because the tariffs are now an unfortunate reality. The economy looks worse too.

Edited March 11, 2025 by Spekulatius

[dealraker]

48 minutes ago, Spekulatius said:

They both should be lower now because the tariffs are now an unfortunate reality. The economy looks worse too.

+1  

[KPO]

Generally agree, but down 30% from highs and the lowest valuation by several metrics in a decade suggests it’s starting to get getting overplayed. These assets will be in place and productive long after the tariff war of 2025.  That said, I agree there’s likely more downside, so I’m wading slowly into CNI.

[sleepydragon]

CP’s options are only trading at 30% vol is seems really low. People haven’t been buying protections . Not sure why there’s no fears on this stock.. 

[Cod Liver Oil]

Hey @dealraker and @Dinarif we do start manufacturing stuff here again, which railroad might benefit? Asking for a friend!!!!! Rails at multi year lows, lots of operational leverage but hard to turn off the capex if the economy gets soft. 

[Dinar]

As you know, I own CP.  While in theory all of the railroads should benefit, I think the primary beneficiary will be Mexico, and hence CP.  I also think the management is the best. 

[Eldad]

I doubt that will ever move the needle but any new manufacturing would likely be built in the South. Most pro business. So CSX, NS, UNP. 
 

I like UNP and CP because they haul the most bulk cargos over vast empty spaces. Bulk is the most profitable. UNP and CP can run longer trains (more profitable) in the vast open areas in which they operate. Also, bulk will keep its moat for rails when driverless trucks come. Intermodal will get hurt. After visiting PHX for spring break and seeing Waymo, driverless trucks are probably here very soon. 

[dealraker]

Cod Liver Oil, I agree verbatim with what Eldad says above.

Edited April 10, 2025 by dealraker

[Cod Liver Oil]

Thank you Dinar, Eldad and Deal. Railroads may have seen the moment of their greatness flicker.

[Dinar]

1 hour ago, dealraker said:

Cod Liver Oil, I agree verbatim with what Eldad says above.

@dealraker Charlie: I have nothing to add!

Edited April 11, 2025 by Dinar

[no_free_lunch]

Have a large position, am down, still feel fine with this pair.

[dealraker]

At some point there will be some type of somewhat increase (I obviously love the "some" word) of freight resurgence that notches up with a bit of sustainability.  Right now there's a small increase but that's of course the beat-the-tariff game.  I see a bottomless 2nd or 3rd quarter of rail freight - or something close.

 

The industrial revolution to the tech revolution or whatever I'm trying to say, it just seems freight has had a decade of stalling growth for the most part.  The rail co's have made the numbers by all kinds of goodies within and many probably didn't do a whole lot of good for the long run for shareholders.

 

Driverless trucks?  Yea, I'd surely believe they come it seems logical to think of this as a significant negative for the railroads.  Still, aside from even that, everything is cyclical and cycles last a lot longer in many cases than people tend to think.  So freight, the type the railroads handle, comes back?  Or we hope it does, or whatever.

 

It just seems the stuff the railroads deal with is in sludge mode, stuck at a level that suggests more isn't necessarily needed?  I've thought for years that trucks would be recognized for the massive damage they do to roads, that taxes would go much higher, that some attempt to move hauling more to the railroads would come.  The experience of driving with truck smothered highways isn't something most would find positive.

 

Yep, things associated with more use of the railroads just has not arrived yet.  Will it?   Volumes pretty flat for a long, long, long time.

 

 

[rogermunibond]

USTR fee on non-US shipping seems to be a net big benefit to railroads connecting the largest US ports.  Rather than make multiple calls on West coast or Gulf or East, shipping makes one port call and offloads all cargo.  Rail will then move to other ports/hubs or into interior.  
 

Should be good for BNSF and UNP and CP. 

[Cityzoo]

I suspect that ultimately the driverless tech will end up benefiting the railroads significantly by reducing the dependancy on engineers.

With public roads, once people have their driver's licence and a vehicle with valid registration there is (basically) no way to block access and people drive in some completely unpredictable ways. I'm sure the driverless tech is compelling, but I will be curious to see how well it deals with the utterly unpredictable chaos that humans are so good at generating.

A railroad is a closed system, with movements controlled by the owner who also has a centralized overview of everything happening on the network. If you believe in driverless trucks, wouldn't it be even easier to believe in driverless trains?

[dealraker]

31 minutes ago, Cityzoo said:

I suspect that ultimately the driverless tech will end up benefiting the railroads significantly by reducing the dependancy on engineers.

With public roads, once people have their driver's licence and a vehicle with valid registration there is (basically) no way to block access and people drive in some completely unpredictable ways. I'm sure the driverless tech is compelling, but I will be curious to see how well it deals with the utterly unpredictable chaos that humans are so good at generating.

A railroad is a closed system, with movements controlled by the owner who also has a centralized overview of everything happening on the network. If you believe in driverless trucks, wouldn't it be even easier to believe in driverless trains?

Yes...if you believe that humans, STB, and congress are capable of acting rationally.  Just imagine though the irrational reaction we'll get from that one god-awful derail and all the tragedy it brings.  

 

 

[sleepydragon]

1 hour ago, Cityzoo said:

I suspect that ultimately the driverless tech will end up benefiting the railroads significantly by reducing the dependancy on engineers.

With public roads, once people have their driver's licence and a vehicle with valid registration there is (basically) no way to block access and people drive in some completely unpredictable ways. I'm sure the driverless tech is compelling, but I will be curious to see how well it deals with the utterly unpredictable chaos that humans are so good at generating.

A railroad is a closed system, with movements controlled by the owner who also has a centralized overview of everything happening on the network. If you believe in driverless trucks, wouldn't it be even easier to believe in driverless trains?

The one driver on a train cost next to nothing compared the stuffs carried on the train, and the driver doesn’t do much driving— it’s mostly things like when the train in on a platform, a human need to check safety, etc. In a sense , train never had a driver like cars

 

[no_free_lunch]

12 minutes ago, sleepydragon said:

The one driver on a train cost next to nothing compared the stuffs carried on the train, and the driver doesn’t do much driving— it’s mostly things like when the train in on a platform, a human need to check safety, etc. In a sense , train never had a driver like cars

 

Agree.  Have a little experience with this.  These trains haul over 100 cars, the per car or per ton cost has to be minuscule. They can probably replace with AI but then you still have a bunch of sensors, road signs, humans cutting tracks, track maintenance, equipment maintenance.  It almost seems easier and cheaper just to pay the 2 guys on the 100-150 car train.

[Blake Hampton]

You guys seem to be knowledgeable on the subject. What is life like for a conductor? They make good money don’t they?

 

edit: after I wrote this quick post and did some research, I realized that I was misunderstanding the conductor for the “locomotive engineer.” Any info on them would be interesting too.

 

Edited April 13, 2025 by Blake Hampton

[no_free_lunch]

12 minutes ago, Blake Hampton said:

You guys seem to be knowledgeable on the subject. What is life like for a conductor? They make good money don’t they?

 

edit: after I wrote this quick post and did some research, I realized that I was misunderstanding the conductor for the “locomotive engineer.” Any info on them would be interesting too.

 

In my limited experience, the engineer is making $100-180k CAD give or take, which is pretty good.  It does depend substantially on where they work from.  Some routes are much more lucrative than others.  Otherwise these guys dont really like the job it seems but the money is so much better than the alternatives. 

 

There are two roles, engineer and conductor.  The engineer is more senior and makes quite a bit more and has a cushier gig but more responsibility.  You start as a conductor and eventually become an engineer but it can take a decade or more.  Just based on my conversation with others.

Edited April 13, 2025 by no_free_lunch

[dealraker]

I think we can assume for the next good while that railroad costs overall aren't headed too much lower.  Yes OR's can go down with more freight, but it is - and honestly has been for some time - simply the NEW NEW THING where if we are going to make any money owning railroads then volumes are going to need to increase.

 

Buybacks at any price and cuts to all things all times simply ain't gunna cut the mustard any longer.  Next door to me here in the Lexington, NC area the hump yard that NSC shut down completely is continually more active with more employees.  It was just as all the local employees said, most likely nothing but management making the numbers for a compensation period and not sustainable.  

 

Edited April 13, 2025 by dealraker

[Jaygo]

I have felt that Pipelines are the new railroads. Hard to build and critical to NA industry. Railroads in the 80-90's were clunky and not viewed as high quality and then Gates / Larson bought 10% and HH was making his rounds and the investment community took notice. Then Buffett bought the group and eventually picked off a giant and its basically been up and to the right since. 

 

I am really interested in the subject matter here but refer to @dealraker @Eldad and others who know the industry better. 

[pricingpower]

2 hours ago, Jaygo said:

I have felt that Pipelines are the new railroads.

I do think one place that analogy breaks is a key change in railroads was the realization that double stacking (and maybe computer controls) would be pretty transformative for their economics.  Outside of higher barriers to competing pipes is there a similar argument for them recently?

 

Munger articulated it like this in the 2007 Wesco meeting

Berkshire’s investment in railroads Railroads –

now that’s an example of changing our minds. Warren and I have hated railroads our entire life. They’re capital-intensive, heavily unionized, with some makework rules, heavily regulated, and long competed with a comparative disadvantage vs. the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors. We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time. There’s a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers in huge classes of business. Bill Gates figured this out years before us – he invested in a Canadian railroad and made eight hundred percent. Maybe Gates should manage Berkshire’s money. [Laughter] This is a good example of how hard it is to change one’s mind and change entrenched thinking, but at last we did change.

 https://worldlypartners.com/charlie-munger-archive/

[Marco Van Basten]

Research report from Wells Fargo dated earlier this week.  It claims that tech and AI can reduce operating ratio by 500-900 basis points.  This implies anywhere from 10-25% EBIT increase depending on the railroad and cost savings, and even more on EBITDA less cap ex (since maintenance cap ex exceeds depreciation), so unlevered free cash flow might be up 12-30%, and levered free cash flow up 15-35%, depending on the outcome and company.  

[fareastwarriors]

Railroad Operator Union Pacific Exploring Deal for Norfolk Southern