Class I Financial Performance 2020

[JPS1]

Kgbw49:  your view of what’s happening in the stock market is in line with those of many professional analysts. 

 

One of the most important indicators of financial performance is pre-tax margin.  The Trailing Twelve-Month average for the Class 1 railroads, excluding BNSF, is 34.6 percent, with a median of 34.1 percent and a standard deviation of 3.8 percent.

 

EBITDA is another important financial performance metric.  For the same grouping, the Trailing Twelve-Month average is 51.5 percent, with a median of 52.5 percent and a standard deviation of 2.4 percent.

[beaulieu]

I think CSX split their stock not too long ago. Also to get a true feel for company valuations you need to add in the number of shares outstanding (share price x number of shares available).

One thing that surprised me is that the combined CP and KCS would have more revenue and more net income than either CSX or NS. Of course CP's long hauls help in this regard.

[kgbw49]

BaltACD, right now there are a couple of things going on that are affecting the stock market on a macro basis. Interest rates are at rock bottom lows, so investors are pushing money in to equities in search of a decent return. The Fed and other central banks have been buying bond securities put out by governments to support their government's borrowing, because the demand for government debt is not high right now due to the low interest rates. Of course, low interest rates support governments borrowing more to finance their spending plans.

So money is looking for higher returns, and with higher returns comes more risk, but money is pouring in to the stock market.

At the same time, railroads in North America are dropping 20%, 25%, 30% of revenues to their bottom line as Net Income. While there are some companies that can exceed that level of profit generation, there are many companies that can't generate that level of profit generation. Consistent Net Income means money for dividends, and then there is the stock buyback and stock appreciation aspect.

The thing about North American railroads is even though they are not generating significant increases in market share, there will always be some things that need to move by rail. Rail still moves 33% of all the ton miles of freight - for now at least, and if all that would shift to truck our highways would be more grid-locked, even with autonomous trucks. Granted, some traffic may almost completely disappear over time, such as coal, but even so, rail will still have a significant share of ton-miles to move for a long time to come, even if it is down to, say, 20% of ton miles in the future.

So markets and investors are likely still looking at railroads as a longer term play, and at least for now, under these conditions, a place to get a decent return.

Now, that is just one person's take on the untamable animal that is the stock market. I am sure there are others out here in the Forum who have even better and more inside information, and even completely different takes on what is going on. And it will be great to hear other's take on things. But again, just one person's take, for now.

Here is a link to a table of various modal shares of US Ton-Miles of Freight from 1980 through 2018 - the last year in the report so far. It is interesting to see how things have played out.

https://www.bts.gov/content/us-ton-miles-freight

 

[BaltACD]

Closing stock prices 3/26

CN - $146.92
CP - $358.22
CSX - $97.66
KSU - $253.62
NSC - $272.91
UNP - $222.92

Historically CSX has wanted their stock trading in the $30 range and I believe most of the other carriers had their stock trading in the realm of two digits, not three.  What is going on?  I get the feeling that the market is being manipulated - by whom and why, I don't know.

[SALfan]

For a little over two years, I was Business Manager for a textile factory, responsible for the accounting and cost accounting functions, among other things.  Cost accounting in a manufacturing entity is based on past experience, production forecasts (in my case, pure fantasy due to corporate management), overhead assigned based on the forecasts, estimates of future costs, guesstimates about what actual production of each product will be and how increases or decreases in each or various products will affect production of the other products, and crystal-ball-gazing about whether the current products will even be in production in six months.  Accounting for sales and direct costs (direct labor and raw material costs) is easy.  Figuring out how to assign indirect costs per unit of production is the kind of project that will make you hit yourself in the head with a hammer because it causes a smaller headache.  From the very little I know about railroad cost accounting, it is even less of an exact science than manufacturing cost accounting.  All that to say, not everything is 2+2=4 exact.  A cost accountant can be conscientiously trying to do the best possible job, and still blow it.  Then you have the ones who play fast and loose with the rules, which makes the numbers even less trustworthy.  Anyone knowledgable in the industry can tell you who the game-players are and whose numbers you can trust, as much as you can trust anyone's numbers.  Best thing to do is to not bet your next house payment on the exactitude of any given number.  Take from one who has been there. 

[JPS1]

SD60MAC9500

 I don't know if Enron accounting practice is to blame. Enron suffered from insider trading, wire fraud, and hedging against itself using phantom entities it created. All this was perpetrated by the C-Suite. It's easy to blame the accounting dept. once funds have been dispersed elsewhere. 

Andrew Fastow, who was the CFO of Enron, went to jail for his role in the fraud.  He oversaw the company's accounting function; he supposedly was the brains behind the accounting shenanigans.  

[SD60MAC9500]

 

I don't know if Enron accounting practice is to blame. Enron suffered from insider trading, wire fraud, and hedging against itself using phantom entities it created. All this was perpetrated by the C-Suite. It's easy to blame the accounting dept. once funds have been dispersed elsewhere.

 

 

 

[JPS1]

kgbw49

 JPS1, don't be too discouraged. We who have walked the walk have lived it and understand how it really is, and that is about the best we can do. 

Thanks for your thoughts.  They are very much appreciated. 

[kgbw49]

JPS1, don't be too discouraged. We who have walked the walk have lived it and understand how it really is, and that is about the best we can do.

[JPS1]

cx500

 I am talking about shading the results, not gross misstatements.  Choose the best year to write off a large capital asset and show a massive loss when fighting for regulatory changes from a government.  

I am embarked on a fool’s earn, but I will have one last go at it.  Rules govern the writing off of an asset.  And they set out how to value that asset.  It is not just something management can decide to do on a whim.

[cx500]

JPS1

 Most of the accountants that I worked with were very conscientious; they took their role and the ethical requirements that go with it very seriously. 

I am sure you are correct.  I wondered at the time if the surprisingly frequent changes of CFO during the EHH reign at Canadian Pacific were due to what he may have been pushing them to do.  They were all relatively short term.

But as others have pointed out, there is wiggle room within the strict rules that any competent accountant can use without compromising even the highest of ethics.  I am talking about shading the results, not gross misstatements.  Choose the best year to write off a large capital asset and show a massive loss when fighting for regulatory changes from a government.  The cash flow is still solidly in the black, about the same as the previous and succeeding quite profitable years, but that year end number looks terrible.

[tree68]

It's possible to pull off shenanigans without breaking any laws.  Move this money into that account, write off certain moneys, etc.  

I believe someone earlier in the thread pointed out that three agencies looked at one set of figures and came up with three different results.

Figures lie, and liars figure.

And to quote Disraeli - there's lies, damned lies, and statistics.

[BaltACD]

JPS1

 

BaltACD

 ENRON, Theranos, Madoff the list goes on and on.  Financial chicanery is as old as time.  

And they represent what percentage of the companies, accountants, CFOs, CEOs, Chief Accountants, etc. in the United States?

Every organization or profession has outliers.  To conclude that they are representative of the whole population or even a neddle moving minority is a statistical fallacy.  It is illogical.  

You never know until they get caught!

[JPS1]

BaltACD

 ENRON, Theranos, Madoff the list goes on and on.  Financial chicanery is as old as time. 

And they represent what percentage of the companies, accountants, CFOs, CEOs, Chief Accountants, etc. in the United States?

Every organization or profession has outliers.  To conclude that they are representative of the whole population or even a neddle moving minority is a statistical fallacy.  It is illogical.  

[BaltACD]

ENRON, Theranos, Madoff the list goes on and on.  Financial chicanery is as old as time.

[MP173]

severe penalties exist for falsifying financial records...I believe a CFO and CEO can face personal liabilities and prison for violating Sarbane Oxley rules.

Will take a look at CN a little later when I have more time.

Ed

[JPS1]

kgbw49

Follow up to JPS1. Some corporate accountants are formerly CPAs who maintain their license after they have left for the corporate world. The American Institute of Certified Public Accountants maintains a stringent code of ethics that all of us CPAs must live by. If we stray from that there can be serious consequences. Following GAAP - the accounting rules - is non-negotiable. 

Spot on!  I never worked in public accounting; I went straight from school to the corporate world.  The company emphasized the importance of the CPA and other certifications.  I got my CPA several years after beginning employment.  

Most of the accountants that I worked with were very conscientious; they took their role and the ethical requirements that go with it very seriously. 

I worked for a Fortune 200 Corporation.  I was the chief accountant for one of the corporation’s operating companies as well as a corporate audit director and chief auditor of one of the company’s oversea subsidiaries.  We had approximately 450 accounting employees, of which 260 were CPAs. I was never asked to or intimidated to bend the accounting rules by anyone in management or on the board of directors. 

[BaltACD]

GAAP has more than enough wiggle room to slant reports to a desired result,  And the CPA's are in the clear.

[kgbw49]

Follow up to JPS1. Some corporate accountants are formerly CPAs who maintain their license after they have left for the corporate world. The American Institute of Certified Public Accountants maintains a stringent code of ethics that all of us CPAs must live by. If we stray from that there can be serious consequences, including potentially legal. Following GAAP - the accounting rules - is non-negotiable.

[JPS1]

jeffhergert

 Not necessarily fraud.  There are different accepted accounting procedures that can produce different outcomes.  

I read once that the executive (maybe all management, although many lower managers no longer get them) bonuses aren't counted toward the OR. 

Jeff

Accountants adhere to Generally Accepted Accounting Principles for the United States.  They don't make the numbers say whatever they or management want them to say. 

 

Financial statements usually are prepared by the company’s staff accountants.  In the case of a public corporation, as well as most private corporations, they are audited by external auditors.  In addition, they may be audited by regulators, i.e., SEC, PUC, etc.  Moreover, their corporate tax returns are examined closely by the IRS. 

 

GAAP accounting and IRS accounting or even regulatory accounting are somewhat different.  The variances are usually attributable to timing differences that usually reverse over time.

 

Accounting rules allow for a variety of estimates, i.e., uncollectible receivables, reserve valuations, asset service lives, salvage values, etc.  Moreover, the rules allow for different accounting methods, i.e., inventory valuation, depreciation, amortization, etc.  Most of the different methods result in the same outcomes over time.  Once adopted estimates and methods must be consistent unless there is compelling evidence that a change is warranted. 

 

The most important financial statement is the Statement of Cash Flows.  It shows how cash, which is the lifeblood of a business, was generated and how it was used.  It shows a different outcome than the Income Statement, which is based on accrual accounting and consists of cash as well as non-cash items.  The Statement of Cash Flows shows the quality of earnings; it is the strongest indicator of the future viability of the entity. 

 

As I understand it, OR = Cost of Goods Sold + Operating Expenses/Net Sales.  Assuming this is correct, direct labor expense, as well as indirect labor expense, i.e., supervision, management, etc. would be charged to cost of goods sold.    

 

Most employee and executive bonuses are unrestricted stock options that are exercisable in two or more years from the grant date.  Under U.S. GAAP, stock-based compensation (SBC) is recognized as a non-cash expense on the income statement on the vesting or exercise date.  It is an operating expense allocated to the appropriate operating line items: 1) SBC issued to direct labor is allocated to cost of goods sold, 2) SBC issued to R&D engineers, as an example, is allocated to R&D expense, 3) SBC issued to management is included in G&A expense. 

 

I don’t know any analysts that hang their analysis of a company on one number.  They look at a variety of key indicators.  Most of them start with EBITDA, which means earnings before interest, taxes, depreciation and amortization.  Warren Buffett, who is no analytical slouch, believes the most important number in the income statement is the pre-tax margin.  That is his starting point.   

[Electroliner 1935]

I still have memories of the fifties when I worked for the "STANDARD RAILROAD OF THE WORLD", the PRR and thinking things are bad, they can't get much worse. We all know how that played out. While I think the class I's are in better finacial shape than the PRR was, I don't have the faith that the money people are all above cooking the books. So I do not put all my investments in any one stock. But it will be fun to watch this play out

[jeffhergert]

charlie hebdo

 

 

BaltACD

 

 

Ulrich

I'm most surprised about UP's numbers..UP was late and last to the PSR party..and look at that OR.

 

 

Considering the 'pressure' that is being placed on Operating Ratio at present - I view the numbers from all carriers with suspicion.

 

 

 

 

That's painting with a pretty broad brush of alleged financial fraud. 

 

Not necessarily fraud.  There are different accepted accounting procedures that can produce different outcomes.  

I remember reading in Trains years ago about one railroad applying for a government backed loan.  The railroad submitted their paperwork showing they had made money the last year or whatever the time period used was.  The government going over the same numbers using a different method said they lost money.  A third independent concern used a different method and said they broke even.  The same numbers crunched three different ways, all using acceptable but different methods came up with three different conclusions.

UP was already on the path to a lower OR before Black Rock took charge and demanded faster changes.  We had G-55+0 before the Unified 2020 Plan.

I read once that the executive (maybe all management, although many lower managers no longer get them) bonuses aren't counted toward the OR.  If they were, I would think it might raise the OR a tad or two.

Jeff

[tree68]

charlie hebdo

That's painting with a pretty broad brush of alleged financial fraud. 

Back when I was working in the weather field, I was involved with upper air (weather balloon) observations.  The observers working on the temperature data (a graph, plotted in real time from the instrument package) would sometimes "trend" the data by tilting the pencil from one side to the other as they traced the temp data.  Much easier than plotting multiple points, etc.

As many have said on this topic over time, accountants can make the numbers say what they want.  

[BaltACD]

charlie hebdo

 

BaltACD 

Ulrich

I'm most surprised about UP's numbers..UP was late and last to the PSR party..and look at that OR. 

Considering the 'pressure' that is being placed on Operating Ratio at present - I view the numbers from all carriers with suspicion. 

That's painting with a pretty broad brush of alleged financial fraud. 

I have seen 'sharp' pencils before.  OR falls into the area we have been discussing of 'cost accounting'.  Published cost accounting can be anything the story teller thinks he can get the story consumer to believe.

[charlie hebdo]

BaltACD

 

 

Ulrich

I'm most surprised about UP's numbers..UP was late and last to the PSR party..and look at that OR.

 

 

Considering the 'pressure' that is being placed on Operating Ratio at present - I view the numbers from all carriers with suspicion.

 

That's painting with a pretty broad brush of alleged financial fraud. 

[BaltACD]

Ulrich

I'm most surprised about UP's numbers..UP was late and last to the PSR party..and look at that OR.

Considering the 'pressure' that is being placed on Operating Ratio at present - I view the numbers from all carriers with suspicion.

[Ulrich]

I'm most surprised about UP's numbers..UP was late and last to the PSR party..and look at that OR.

[BaltACD]

Surprised at the NS numbers - across the board.

[kgbw49]

Here are several interesting 2020 financial metrics for the seven Class I railroads for information and discussion:

FY20 Results of Revenue, Net Income, Net Income as % of Revenue, and Operating Ratio

BNSF - $20.869 billion Revenue, $5.161 billion Net Income, 24.73% of Revenue, and 61.6 OR

CN -     $12.819 billion Revenue, $3.562 billion Net Income, 25.78% of Revenue, and 65.4 OR

CP -     $  7.710 billion Revenue, $2.444 billion Net Income, 31.70% of Revenue, and 57.1 OR

CSX-   $10.582 billion Revenue, $2.765 billion Net Income, 26.12% of Revenue, and 58.8 OR

KCS-   $  2.633 billion Revenue, $0.619 billion Net Income, 23.51% of Revenue, and 61.9 OR

NS-     $  9.942 billion Revenue, $2.013 billion Net Income, 20.25% of Revenue, and 69.3 OR

UP-     $19.533 billion Revenue, $5.349 billion Net Income, 27.38% of Revenue, and 59.9 OR