Railroads

[ACooke]

On 2/18/2023 at 3:51 AM, dwy000 said:

Thanks!  Hope those last two come out in print - I'm not a fan of e-reading.  But great recommendations!

I finished Railroader a couple of week ago; very worthy read.

[Spekulatius]

I looked at NA Railroad stocks and it’s interesting to see the progression of leverage over time. CSX and BSC always seem to operate at higher leverage -2.5-3x while UNP went from 1x to almost 3x now from 2015 to now. The funds went mostly to dividends and buybacks of course.

CNI kept steady around 1.5x leverage.

 

Somewhat surprising, but it looked like UNP stock has underperformed all the other RR stocks the last 5 years, despite all those buybacks. UNP for a long time has performed better than CSX and NSC because they had better growth (less dependency on coal for once). I so t k ow what to make of this, other than it’s not what I have expected. none of these stocks look cheap to me based valuation and near term outlook (which looks very muted).

[Dinar]

@Spekulatius, when you look at CP, you need to adjust for what will be close to two billion in synergies with KSU once the deal closes, and the fact that KSU has been growing volumes in low single digit per year.  Canadian railroads - both CP & CNI can probably grow volumes at 1% per annum, layer in price = inflation + 0.5-1% per annum, possibilities of additional costs cuts thanks to technology, and then they do not look expensive anymore, at least to me.

[gfp]

It would be cool if TIKR covered BNSF since it is still an SEC reporting company but it doesn't appear to.  I'm sure a Bloomberg terminal could produce similar numbers for BNSF to compare, but I know that Berkshire has been taking virtually all of BNSF's after tax earnings out as (tax free) dividends to National Indemnity for many years.  I haven't don't the math recently but I assume Berkshire is close to pulling out their entire 'headline' cost basis from the BNSF acquisition in cash dividends - I think they paid something like $34 Billion all in if I remember correctly, maybe a bit less.  The true cost basis is complicated by the shares used for part of the deal of course.

[John Hjorth]

Pieces by Ravi Nagarajan about railroads :

 

1. Burlington Northern Santa Fe, &

2. Union Pacific Corporation .

[thepupil]

since 2010, BNSF has paid out about $46 billion of dividends to Berkshire. total Liabilities grew from $33B to $45B, so about $11B. This was mostly increase of Debt from about $12B to $25B. The deferred tax liability was pretty constant at $14-$15B. Revenue went from $17B to $26B, EBITDA from ~$6B to $12B (so ND/EBITDA went from about 1.8x to 2.0x). Sales / Employee from $443K to $662K, Personnel Expenses from $4B to $5.2B, OM from 26% to 35%. 

 

BNSF's gross property wentr from $46B to $82B 2010- and equity from $35B to $46B. 

 

BNSF has certainly enjoyed very nice margin expansion, returned lots of capital to Berkshire and been a very successful investment.

 

 

[gfp]

Thanks John, that is a good piece on BNSF.  

 

"

• Since the acquisition, BNSF has distributed $47.7 billion to Berkshire, accounting for all free cash flow plus the net proceeds of additional debt incurred since the acquisition. "

Ravi takes the carrying value of Berkshire's investment in Burlington stock before the acquisition, where I usually used Berkshire's cost basis on that stock (much of which was acquired by selling puts interestingly).  I think that is where I got a number slightly below Ravi's $33 Billion.

 

Warren does private equity!  Don't let those PE boys have all the fun

 

edit: thanks pupil, I knew you could work your terminal magic on this one

Edited February 23, 2023 by gfp

[Spekulatius]

27 minutes ago, gfp said:

It would be cool if TIKR covered BNSF since it is still an SEC reporting company but it doesn't appear to.  I'm sure a Bloomberg terminal could produce similar numbers for BNSF to compare, but I know that Berkshire has been taking virtually all of BNSF's after tax earnings out as (tax free) dividends to National Indemnity for many years.  I haven't don't the math recently but I assume Berkshire is close to pulling out their entire 'headline' cost basis from the BNSF acquisition in cash dividends - I think they paid something like $34 Billion all in if I remember correctly, maybe a bit less.  The true cost basis is complicated by the shares used for part of the deal of course.

The last filing from BNSF seems to be from the 2017 10-K. In this one, it seems like they lend out almost $20B (intercompany note) to Berkshire. Are there any later filings?

https://www.sec.gov/Archives/edgar/data/15511/000001551118000005/bnsfrailway-12312017x10xk.htm#s5B4E295B896257D1AFA839516B80DBB9

 

And yes, it does look like WEB got his invested money back.

[gfp]

https://www.sec.gov/edgar/browse/?CIK=934612

[Spekulatius]

6 minutes ago, gfp said:

https://www.sec.gov/edgar/browse/?CIK=934612

Thx, should have found this one myself.

Looks like the debt really hasn't increased since 2017 - it's $21.7B and roughly ~$10B in EBITDA. There is also $1.9B in cash, so leverage is only ~2x EBITDA. WEB isnt milking BNSF for cash right now.

 

UNP has almost 3x EBITDA leverage and is A rated credit.

[John Hjorth]

1 hour ago, gfp said:

Thanks John, that is a good piece on BNSF.  

 

"

• Since the acquisition, BNSF has distributed $47.7 billion to Berkshire, accounting for all free cash flow plus the net proceeds of additional debt incurred since the acquisition. "

Ravi takes the carrying value of Berkshire's investment in Burlington stock before the acquisition, where I usually used Berkshire's cost basis on that stock (much of which was acquired by selling puts interestingly).  I think that is where I got a number slightly below Ravi's $33 Billion.

 

Warren does private equity!  Don't let those PE boys have all the fun

 

edit: thanks pupil, I knew you could work your terminal magic on this one

 

@gfp,

 

Ravi is a hell of guy, and a sworn-in & card holding Berkaholic like you and me, absolutely incredible what kind and amount of work he has shared with everyone interested in it, including me, now since 2009, on his website.

 

The BNSF dividend numbers discussed above are simply mind boggling. Absolutely incredible what can be achieved over time on the long haul with a business with perhaps not superstar ROE and ROIC, if the price one paid was about right, and it is given the sufficient time to work out and do its compounding magic, in the meantime operated efficiently. [linear thinking and thoughts vs. the concept of compounding over time].

 

Also here, it's about there are the right buyers and owners  [and the opposite], when we talk about utilities, because of ones responsibility for it [as a piece of infrastructure of the society],  the owner can't treat it at will. This is already covered elsewhere here on CoBF related to what has happened recently in the United States.

Edited February 23, 2023 by John Hjorth

[valueseek]

for the last 5-10-15-20 years the sales CAGR on 3 US rails is around 3/2/2/3% give or take. 10-15 EPS CAGR is 11-12%. 5 EPS CAGR is around 5%. 2% dividend yield. Price return or stock CAGR is around 12-13% CAGR. Add 2% for div. yield so around 14-15% total stock CAGR. Starting valuations were slightly lower at 13-14 times PE, margins were lower and leverage was lower. Given starting valuations are around 16-17 times, margins are higher but lower than last year or so and still room to grow albeit slowly, and possibly higher volumes given US infra/near shoring focus, EPS CAGR for next 10+ years could be 9-10%. Add 2% div. yield. Subtract 1% or so for ending PE reduction, fair probability to get -HSD10% returns from rails from here over the course of the decade.

[rogermunibond]

$ in Billions

 

[dealraker]

Given that I began this thread complaining about the NSC derailure?  This indicates why I diversify, my knowledgable brilliance shines based on the first chart.   LOL!  Again, when you look in the mirror and don't see Warren...then you aren't Warren.

 

https://www.washingtonpost.com/nation/2023/02/28/train-history-charts/?pwapi_token=eyJ0eXAiOiJKV1QiLCJhbGciOiJIUzI1NiJ9.eyJzdWJpZCI6IjQyMTM3MTQiLCJyZWFzb24iOiJnaWZ0IiwibmJmIjoxNjc3NjQ2ODAwLCJpc3MiOiJzdWJzY3JpcHRpb25zIiwiZXhwIjoxNjc4OTM5MTk5LCJpYXQiOjE2Nzc2NDY4MDAsImp0aSI6ImY3MGE4NzM0LTk2ODYtNGQ3Zi1hY2M2LWE4YjAxNGY2NDc2YyIsInVybCI6Imh0dHBzOi8vd3d3Lndhc2hpbmd0b25wb3N0LmNvbS9uYXRpb24vMjAyMy8wMi8yOC90cmFpbi1oaXN0b3J5LWNoYXJ0cy8ifQ.1lFK3tPUbMpoamiLeGzpzRXY1bAqoGqmIFqTrQvTmIQ

[dealraker]

Interesting as to maintenance that may affect liability:

 

https://www.theguardian.com/us-news/2023/mar/03/us-rail-workers-east-palestine-ohio-train-crash?utm_source=nextdraft&utm_medium=email

[dealraker]

GATX - further development as to Ohio:

 

https://seekingalpha.com/news/3943945-gatx-owned-railcar-implicated-in-ohio-derailment-wsj

[Castanza]

16 hours ago, dealraker said:

Interesting as to maintenance that may affect liability:

 

https://www.theguardian.com/us-news/2023/mar/03/us-rail-workers-east-palestine-ohio-train-crash?utm_source=nextdraft&utm_medium=email

You’ll find this culture in all of the logistics related businesses. Getting the product moved at all costs takes precedent. This makes me think back to when I was working my way through college at UPS. 
 

Two stories:

 

Was finishing up the day with some residential delivery and my brakes went out while in a development. Was driving this old piece of junk p800. Called in to the center and the manager said to just try and finish the day but use the e-brake (hand brake) to finish the day. They were more worried about getting the pickup pieces back to the center before the Louisville freight left. 
 

Was driving back to the center doing 55 on an Ohio country highway. Had a rear re-tread peel off the tire. Picture 2 feet of rubber slapping around attached to the tire with internal cable.    Called in and they said limp it back lol…so I was a little more seasoned and disgruntled at this point. Said “ok boss”. Made sure no cars were around, pulled out and got it up to 25. The rubber flap slapped up under the wheel well, snapped off the gas tank fill tube and absolutely shredded the side of the package car. Pulled over with a smirk on my face, called it and again and said “you’re gonna need a tow truck”. They learned to send out a mechanic to change the tire next time. 
 

Moral of the story…I’d be willing to bet there are ticking time bombs like this all throughout the industry. Shit rolls downhill and as employees and management catch heat from up the chain you eventually end up with the straw that broke the camels back. Hence the Ohio train issue. 

[dealraker]

2 hours ago, Castanza said:

You’ll find this culture in all of the logistics related businesses. Getting the product moved at all costs takes precedent. This makes me think back to when I was working my way through college at UPS. 
 

Two stories:

 

Was finishing up the day with some residential delivery and my brakes went out while in a development. Was driving this old piece of junk p800. Called in to the center and the manager said to just try and finish the day but use the e-brake (hand brake) to finish the day. They were more worried about getting the pickup pieces back to the center before the Louisville freight left. 
 

Was driving back to the center doing 55 on an Ohio country highway. Had a rear re-tread peel off the tire. Picture 2 feet of rubber slapping around attached to the tire with internal cable.    Called in and they said limp it back lol…so I was a little more seasoned and disgruntled at this point. Said “ok boss”. Made sure no cars were around, pulled out and got it up to 25. The rubber flap slapped up under the wheel well, snapped off the gas tank fill tube and absolutely shredded the side of the package car. Pulled over with a smirk on my face, called it and again and said “you’re gonna need a tow truck”. They learned to send out a mechanic to change the tire next time. 
 

Moral of the story…I’d be willing to bet there are ticking time bombs like this all throughout the industry. Shit rolls downhill and as employees and management catch heat from up the chain you eventually end up with the straw that broke the camels back. Hence the Ohio train issue. 

Fantastic story Castanza and yea -- why would anyone think otherwise as to the likely culture.

 

My family owns the land where Buffalo Bill Cody's Wild West Show train wreck occurred on the Norfolk Southern  (then Southern Railway)- adjoining Swearing Creek, Linwood, NC.  It was essentially the end of his run, Annie Oakley never really recovered.  https://www.ourstate.com/buffalo-bill-wild-west-show/

Edited March 4, 2023 by dealraker

[dealraker]

Grrrrr....NSC....it was not here on COBF but other places where I complained with a vengeance about management buying back stock progressively more agressively at higher prices.  The precise bunch always replied in the moment of gleeful euphoria.

 

These always went like: "Dealraker, the price is higher than the buybacks you mention so your thesis is..."

  

It was the same bunch lecturing me 5 years ago the Brookfield Property was a 7 bagger in ten years from a price near $30.  Somebody give the all these MF'ers some experience in life plus a tad of patience please so anything at all they do or write actually makes some tiny bit of logical sense.  

 

Wife says, "Dude, you need to get some serious exercise today," as she reads my posts.  

[Dinar]

@dealraker, Charlie, I hate to go academic on you, but I think there have been a number of studies that should that companies routinely buy-back stock at the wrong time.  It is almost a sell signal, with a few exceptions.  

[dealraker]

4 hours ago, Dinar said:

@dealraker, Charlie, I hate to go academic on you, but I think there have been a number of studies that should that companies routinely buy-back stock at the wrong time.  It is almost a sell signal, with a few exceptions.  

  Academic is ok.  And correct!  LOL. 

[dealraker]

Roaring back.  Do believe I read and listened to CSX state "We were understaffed and lost business."

 

BNSF has the best model and the best management in my view.  

 

https://seekingalpha.com/news/4058690-union-pacific-loses-major-intermodal-contract-rival

[gfp]

Thanks dealraker - nice to see BNSF take intermodal business from UNP.

[Eldad]

43 minutes ago, gfp said:

Thanks dealraker - nice to see BNSF take intermodal business from UNP.

Is it a PSR vs nonPSR situation? Did UNP want to lose it? 
 

Can anyone remind me of Buffett’s argument against PSR? Is he against it or just wants to be hands off and let BNSF do their thing? 
 

With a duopoly in the Western US, and a limited capacity to add more volume to your lines without PSR, why would you focus on taking market share? 

[Whensthepaintdry?]

I saw this the other day. HBO’s last week tonight with John Oliver had an episode on rails and PSR. I couldn’t believe a topic like that made up a whole episode on John Oliver.