OMAHA, Neb. — CSX Transportation’s financial turnaround — including a record-low quarterly operating ratio of 58.6 percent — may increase Wall Street pressure on the rest of the American railroad industry. Analysts compared U...
http://trn.trains.com/news/news-wire/2018/07/19-analysts-ask-why-union-pacific-isnt-more-like-csx
Brian Schmidt, Editor, Classic Trains magazine
One quarter's results do not a miracle make, especially if you had to go through a bad quarter or two or four to make this quarter look good.
Let's see what happens a year from now.
I agree.. one quarter is too short a time frame. The OR spread over the year along with more numbers on customer and employee turnover, safety, and asset utilization would be more meaningful. One fresh loaf does not a bakery make! But just the same.. a low OR even over a short span probably isn't bad news.
I used to have a sizable position in a mutual fund called Baron Asset, run by Ron Baron. He made a point of getting stocks for the long haul without worrying about short term results. It did well for a long time but when he got older and semi-retired, the people he put in charge didn't do as well as him.
For the six months of 2018 ended June 30, 2018:
CSX had $5.978 billion in revenue and dropped $1.572 billion or 26.3% of revenue to the bottom line as net income.
UP had $11.174 billion in revenue and dropped $2.819 billion or 25.5% of revenue to the bottom line as net income.
CP had $3.334 billion in revenue and dropped $784 million or 23.5% of revenue to the bottom line as net income.
KCS had $1.321 billion in revenue and dropped $294 million or 22.3% of revenue to the bottom line as net income.
CN, NS and BNSF are yet to report as of 07/20/18.
So, what the analysts are saying is that instead of using their money to improve their business, they should just give more of it to the investors?
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
tree68 So, what the analysts are saying is that instead of using their money to improve their business, they should just give more of it to the investors?
Exactly! The fox is in 'the henhouse' at CSX...
Hedgefunds are most interested in extracting as much 'blood' as they can from their investments/victims(?); then leaving the carcass for the scavengers to pick apart.
That's really what did in Baldwin... they paid exorbitant dividends to keep the stock high, depriving themselves of moving forward. They should have built up a sizable war chest to hire the best of the best and research and development to be miles ahead before and after the war.
samfp1943 tree68 So, what the analysts are saying is that instead of using their money to improve their business, they should just give more of it to the investors? Exactly! The fox is in 'the henhouse' at CSX... Hedgefunds are most interested in extracting as much 'blood' as they can from their investments/victims(?); then leaving the carcass for the scavengers to pick apart.
Corporate Vampires! Mantle Ridge the impaler!
Never too old to have a happy childhood!
They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books.
kgbw49They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books.
Leave the corporate shell barely floating and weighted down by debt. The cement shoes of Hedge Funds.
tree68So, what the analysts are saying is that instead of using their money to improve their business, they should just give more of it to the investors?
UP is doing that to raise the price of any future takeover attempt. The material impact on it's bond rating is negligable. They got a downgrade from an A rating to an A- rating. I would be concerned if they were in the low B's but they have plenty of buffer financially still and once they achieve their target operating ratio, they will be taking in larger amounts of cash. If you read their rationale they also state their physical plant is in excellent shape and they do not see large capital expenditures for track maintenence or equipment purchases for at least another 5 years. So their Capital Budgets will be lower as well. Cash has to go somewhere, if they keep it in a cash account they will become a takeover target for the pot of gold. Returning stock shares to the treasury is a relatively safe route.
I am just wondering how high UP will let it's stock rise on a per share basis though. Typically above $150 they do a two for one split to drop back to $75 a share but with the stock buyback they could let it rise to $200 to $250 a share.
It's a one time plan. I don't see anything that says the share buyback is longer term than 2-3 years that it will take to complete the buy back. Pretty sure the increase in dividend is actually a dividend cut because the number of shares outstanding will be reduced.....I didn't look though. Point is that might be a spending reduction more than a spending increase.
Anyhow, this is classic American Corporate Finance, in good times you want to return as many shares as you can to the treasury or otherwise invest in the physical plant or plant expansion. UP commented in it's financial notes that it's investment budgets over the next few years will be stagnant or decrease as it's plant is already in excellent shape and it feels it will free up more locomotives and rolling stock with the reduction in operating ratio. Which also makes sense.
Cash has to go somewhere, they can't keep a large sum in a cash account without becomming a takeover target. Outside company can buy UP and use what is in the cash account to pay part of the acquisition costs. Hence UP is smart to either return shares to the treasury or invest back into the company. They stated investing back into the company they have already filled that cup.
So in the future of the next 3-5 years:
1. UP will be spending less on Capital Budgets for track, locomotives and rolling stock.
2. UP will free up more locomotives and rolling stock via increase in it's operating ratio (targeted).
3. Cash allocation for dividends might decrease due to less shares on the market which affords UP to increase dividend per share to attrack more buyers.
4. Improved ratio will return more cash to the bottom line.
5. They can take on more leverage (debt) without much of a material impact to the bottom line given their revenue forecasts.
6. Moody's only downgraded their debt rating to a A- from an A which is not significant either but reflects a little concern on behalf of Moodys they might not meet their targets consistently resulting in their debt quality falling. However, if they do, you should expect that rating to rise back to an A and possibly higher. The drop from A to A- minus only reflects a relatively minor concern on the part of Moody's.
2. If UP frees up more locomotives after all the ones EHH put out to pasture at CP, CN, and CSX, Id' hate to be a used locomotive dealer right now.
Tagging on to rrnut282’s comment, I suppose it may also depress new locomotive sales to some degree.
Granted the older and less fuel efficient units will be the ones retired, but if one looks at NS’s rebuild programs as an example, they‘ll run quite some time before needing large numbers of new units.
If I recall correctly, UP is still rostering something like 200+/- SD9043MAC units. If the NS SD70ACU program is successful perhaps they will end up in a similar program either at UP or on another road.
kgbw49If I recall correctly, UP is still rostering something like 200+/- SD9043MAC units. If the NS SD70ACU program is successful perhaps they will end up in a similar program either at UP or on another road.
How old is the GP-15? They still have some of those ex-C&NW GP-15's roaming Wisconsin every so often. I thought they last produced those in the 1970's or 1980's?
Another for-what-it-is-worth observation on the original subject line of this thread.
If CSX is dropping 26% of revenues to the bottom line and UP is dropping 25% of revenues to the bottom line, UP is right there with CSX right now.
The real question is, why isn't UP, CSX, NS, KCS, CN, CP not more like BNSF?
Editor Emeritus, This Week at Amtrak
For the first six months of 2018:
CN had revenues of $6.825 billion and dropped $2.051 billion or 30.1% of revenues to the bottom line as net income.
Here is an interesting comparison from another capital-intensive industry.
For the first half of 2018:
Boeing had revenues of $47.640 billion and dropped $4.673 billion or 9.8% of revenues to the bottom line as net income.
kgbw49 They are all loading up on debt to do stock buybacks.
Rio Grande Valley, CFI,CFII
CMStPnP ......in good times you want to return as many shares as you can to the treasury or otherwise invest in the physical plant or plant expansion.
As noted in the original post, a corporation that has excess cash is a takeover target. So, management has to decide the optimum use for the cash.
If a corporation like UP buys back its shares, one can be reasonably certain that some sharp pencils were put to the analysis to determine that buy backs were the best outcome for the corporation's shareholders.
Over the past 20 to 25 years the trend in Corporate America has been to reduce dividends and increase share buybacks. Doing so usually results in an increase in the share price, which can help the corporation if it re-issues the shares.
Unlike dividends, which are taxable to the recipient, an increase in share price does not generate a tax liability until the shares are sold. So, according to many analysts, buybacks benefit the long-term investor more than dividends.
rrnut282 One quarter's results do not a miracle make, especially if you had to go through a bad quarter or two or four to make this quarter look good.
Good point!
PJS1:
Not all companies have reduced dividends the past 25 years. The tax situation on both LTCG and dividends have been attractive.
I own a number of equities and the majority have had very aggressive dividend increases the past 10 years, perhaps longer. For instance, CN has increased dividend (yearly) from 46 cents in 2008 to a current 1.82 (yearly)....big increase.
CN has been very wise with their FCF, investing in property, share buybacks, and increasing dividends.
There are obviously two schools of thought, actually 3 on what to do with cash generated. I like the CN model of increasing dividends and share buybacks. They need to seriously invest in capacity, particulary in Western Canada but their recent quarterly results indicate they are back on the mainline after a quarter running at restrictive speed on a siding. New CEO with motivational factors must have worked.
Ed
kgbw49 They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books.
It will be interesting to see how these railroads that have been loading up on long-term debt to return more than 100% of their annual earnings to shareholders the last 5-7 years or so fare over the next several years with depressed traffic, depressed revenue, and large interest payments. Several of the Class 1 railroads more than doubled their long-term debt over the last 5-7 years.
kgbw49 kgbw49 They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books. It will be interesting to see how these railroads that have been loading up on long-term debt to return more than 100% of their annual earnigs to shareholders the last 5-7 years or so fare over the next several years with depressed traffic, depressed revenue, and large interest payments. Several of the Class 1 railroads more than doubled their long-term debt over the last 5-7 years.
It will be interesting to see how these railroads that have been loading up on long-term debt to return more than 100% of their annual earnigs to shareholders the last 5-7 years or so fare over the next several years with depressed traffic, depressed revenue, and large interest payments. Several of the Class 1 railroads more than doubled their long-term debt over the last 5-7 years.
CSX stock was near $80 several weeks ago. Closed below $50 today.
BaltACD kgbw49 kgbw49 They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books. It will be interesting to see how these railroads that have been loading up on long-term debt to return more than 100% of their annual earnigs to shareholders the last 5-7 years or so fare over the next several years with depressed traffic, depressed revenue, and large interest payments. Several of the Class 1 railroads more than doubled their long-term debt over the last 5-7 years. CSX stock was near $80 several weeks ago. Closed below $50 today.
It closed at $92.50 November 17, about eight months later What does that say?
charlie hebdo BaltACD kgbw49 kgbw49 They are all loading up on debt to do stock buybacks. That is the only way they can “return more cash to shareholders” each quarter than they earn in net income. That loading up on debt will eventually have to end, of course. But that is how these hedge fund raiders do it. Pull out cash now and leave long term debt on the books. It will be interesting to see how these railroads that have been loading up on long-term debt to return more than 100% of their annual earnigs to shareholders the last 5-7 years or so fare over the next several years with depressed traffic, depressed revenue, and large interest payments. Several of the Class 1 railroads more than doubled their long-term debt over the last 5-7 years. CSX stock was near $80 several weeks ago. Closed below $50 today. It closed at $92.50 November 17, about eight months later What does that say?
It says in the historical framework of CSX that the stock should be split on a 3 for 1 basis to put the shares back into the traditional $25-35 range the CSX normally trades at.
BaltACDt says in the historical framework of CSX that the stock should be split on a 3 for 1 basis to put the shares back into the traditional $25-35 range the CSX normally trades at. Add Quote to your Post
Normally UP trades at $70-80. I have never seen it below $60 a share. I have no idea why they let the stock soar to around $200 a share.
CMStPnP BaltACD t says in the historical framework of CSX that the stock should be split on a 3 for 1 basis to put the shares back into the traditional $25-35 range the CSX normally trades at. Normally UP trades at $70-80. I have never seen it below $60 a share. I have no idea why they let the stock soar to around $200 a share.
BaltACD t says in the historical framework of CSX that the stock should be split on a 3 for 1 basis to put the shares back into the traditional $25-35 range the CSX normally trades at.
Stock trading price ranges indicate what type of investor the company's are trying to interest. Low stock prices are for the 'Mom & Pop' type investor has 'some' money to play with. High stock prices are for the 'High Rollers', those that accept that their investments can and do fluctuate by Million$ each and every day with Berkshire Hathaway A, currently priced at $343K a share, being such a stock.
Stock prices run the gammut from pennies per share to Berkshire Hathaway (and possibly others) - each seeking their own markets.
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