Traffic growth on the rails is just that.. A dog that won't hunt.. The current scenario concerning NS, and Ancora just proves that point thousands of times over...
The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The railroads main customer is the shareholder, and has been for sometime.
Should we accept the status quo?...
Deregulation gave shareholders the opportunity to make lots of money, but they got greedy.
Reregulation will eventually put railroads back where they were in the 1970's: struggling to survive.
SD60MAC9500Traffic growth on the rails is just that.. A dog that won't hunt.. The current scenario concerning NS, and Ancora just proves that point thousands of times over... The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The real customer is the shareholder, and has been for sometime. Should we accept the status quo?...
The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The real customer is the shareholder, and has been for sometime.
That is the cross that any business that deals with real products as opposed to financial products have to deal with in dealing with their stock holders.
Not every business can clear bushels of cash without producing real products or services.
Never too old to have a happy childhood!
IIRC, average-man investors (before the PennCentral debacle, anyway) used to buy major railroad stocks like PRR for their dividends, which were usually decent-sized and dependable. I don't recall hearing of people buying such stocks hoping for a big increase in share prices in a few years.
The focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
In the 12-13 years after the Great Recession when the Federal Reserve kept interest rates unusually low, the railroad companies almost across the board touted them returning more cash to shareholders than net income earned.
UP, for instance, in 2018 returned $10.5 billion and in 2019 returned $8.4 billion, both amounts over 100% of net income for the year.
They did so with dividends, but the vast majority was stock repurchases using issuances of long term debt.
Long term debt for most of the large railroads except for CN increased by several magnitudes over where it had been before the Great Recession.
All that debt will have to be rolled over eventually, likely at higher rates.
NKP guyThe focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
I would opine that share price isn't a concern as much as how much it can be increased, and how quickly.
I don't think "long term" is a phrase in many of today's investor's vocabularies.
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...
Remember - 'Activists' always think they are smarter than everyone else.
Whether they are or not.
Balt drops the MOAB of all truth bombs right there.
George Hilton maintained that one of the things that did in the interurbans was relying too much on debt financing versus equity financing. With the latter, cutting off dividends during a downturn will tick off the shareholders, but won't bankrupt the company. With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster - though most of the hedge funds would have laready taken the money and run.
That "rail revival" baloney was aimed at institutional investors -not- shippers.
Open for business!
Erik_Mag With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster
With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster
For some of the investors involved, maybe. For the population more broadly, probably not. All large railroads are producing very healthy returns on invested capital and have been for some time - and they are not particularly large companies anymore. (Union Pacific is only the 56th-largest company in the S&P 500 by market cap.) If they get in trouble for financial games unrelated to their operations, someone will still take the company as a going concern. Similarly, if their operations weaken, a strong balance sheet probably won't protect the operating people from having the push hard on the cost-savings pedal.
On a related note: regulations on financial transactions, like limiting stock buybacks, would be silly and probably unproductive. Regulations that change the operating cash flow are the ones that have the potential to weaken the industry and hurt people other than the shareholders and bondholders.
Dan
NKP guy IIRC, average-man investors (before the PennCentral debacle, anyway) used to buy major railroad stocks like PRR for their dividends, which were usually decent-sized and dependable. I don't recall hearing of people buying such stocks hoping for a big increase in share prices in a few years. The focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
The biggest change is just the realization by Wall St. that share repurchases are a far more tax-efficient way to return profits to investors than dividends are. Smart people have known this for a while, but it took a while for the idea that repurchases are an equally valid use of profits to catch on with the public at large. (As your post suggests, even then the lesson hasn't quite penetrated to the retail investor.)
Issuing debt to fund share buybacks is a little harder to defend, IMHO. If I thought the stock was undervalued relative to current interest rates, I could buy the stock on margin myself, thank you very much. I don't need the board of directors to make that decision for me.
100% agree that share repurchases are more tax-efficient - rather pay capital gains tax rate than the individual income tax rate on dividends.
100% agree that share repurchases themselves are not the issue, but leveraging up to make share repurchases is an issue. Of course, the piper will be paid years later when the debt needs to be refinanced as higher interest payments will bite into future earnings.
it is one thing to borrow for capital needs where the cash is being put into a long-lived asset, and another thing to borrow for a one time "sugar high" returning over 100% of net income to shareholders each quarter as was done so prodigiously during the 2010s.
The past is history and the future is a mystery. We'll see how it all shakes out during the latter half of the 2020s.
dpeltier On a related note: regulations on financial transactions, like limiting stock buybacks, would be silly and probably unproductive. Regulations that change the operating cash flow are the ones that have the potential to weaken the industry and hurt people other than the shareholders and bondholders.
No argument from me on poorly thought regulations can do more harm than good. Perhaps the simplest way to discourage the equity to debt transfer is to disallow deducting interest payments on debt taken to buy back stocks, though that still may leave leveraged buy-outs as a loophole.
The real culprits aren't the hedge funds, its the vast majority of passive shareholders who don't vote their shares and don't bother in the least to be informed. In such an environment those folks who do vote and participate have a disproportionate say in what happens. It would be no different if voter turnout in the next federal election is, say 5%.. those 5% getting their way.
The "general setup" needs to be overhauled so that shareholders have more accountability and skin in the game. Currently the stock market is little more than a casino and people do little more than "betting and red" when they buy shares/ownership in a business. If red looks bad then sell and buy green tomorrow.
Ancora is a threat because they largely have the field to themselves...the vast majority of other shareholders have their heads in the sand (or somewhere else), which is why NS may very well be gutted with layoffs and service reductions in the near future. It's sad, but what else can one expect when the vast majority of shareholders remain passive and silent? We hear about election apathy all the time, but the same sort of apathy is hard at work undermining the foundations of capitalism.
A lot of stock is held by institutions, such as pension funds, and they have much influence or should know better.
MidlandMike A lot of stock is held by institutions, such as pension funds, and they have much influence or should know better.
Yes, and even there, it is individual investors who own stock in those institutional investors. Most are just along for the ride. The fund managers know that, and this is why they tend to focus on the short term and why there's so much focus on share price appreciation.
According to the Harvard Business Review, Pensions and Investments, Securities Industry and Financial Markets Association, etc., approximately 80% of the S&P 500 shares are owned by institutional investors, i.e., pension funds, mutual funds, etc. The same percentage, give or take 10%, probably applies to the total securities market.
The funds are manged by sophisticated financial managers that are supported by even more sophisticated financial analysts. The notion that they have a short term view of investing is not supported by the evidence.
Rio Grande Valley, CFI,CFII
PJS1 MidlandMike A lot of stock is held by institutions, such as pension funds, and they have much influence or should know better. According to the Harvard Business Review, Pensions and Investments, Securities Industry and Financial Markets Association, etc., approximately 80% of the S&P 500 shares are owned by institutional investors, i.e., pension funds, mutual funds, etc. The same percentage, give or take 10%, probably applies to the total securities market. The funds are manged by sophisticated financial managers that are supported by even more sophisticated financial analysts. The notion that they have a short term view of investing is not supported by the evidence.
They are always looking for maximum ROI every quarter - the company itself be damned. Crank up the computers and let them trade according to the algorithm they have been programmed with.
They are the exact audience that applauds PSR.
I am hoping that the institutional investors have a long term view, but it seems they go along with the activist investors and Harrison type takeovers at CN, CP, CSX, etc.
Another opportunity to sing my sad, sad song. (along with many others...)
Carload ain't where it's at. It's shrinking. It's boutique business. The general purpose box car is dying. There are almost no reloads. Special purpose cars operating in dedicated lanes, empty one way, loaded the other are the rule. Large shippers. Large consignees. Think beer, drywall, scrap metal, trash.
Optimizing the railroad to serve shrinking business is folly. The operating plan to serve this traffic was optimized in the early 2000's. DPUs led to another round of optimizing the train plan in the 2010s. That's it. That's all there is. Oh, and BTW, just because the law allows 11:59 of work on 8 hours rest doesn’t mean it’s a good business practice. Stop trying to optimize productivity by HOURS WORKED.
Meanwhile, intermodal grows almost despite itself. If you can run the trains sort of reliably and have terminals and services in the right spots, the business will come. ...and it has.
If you arrange your railroad to serve carload traffic and just try to squeeze in the intermodal as an afterthought, you're going to fail. The trains won't run. The service will be too spotty.
So, the way forward is to optimize you plant for intermodal and TRY TO FIGURE OUT HOW TO MOVE THE CARLOADS STUFF IN THAT ENVIRONMENT! (maybe all caps will help?)
The two large markets not heavily penetrated by intermodal are I-81 and I-85/95. Hello NS? Remember your Crescent Corridor idea? Wake it back up.
9 crews from Harrisburg to Memphis doesn't work. Fix it.
Oh, by the way, if you want to be around in another 30 years, figure out how to do ECP and electrify. Hint, hint, it's not using the ECP stuff you've been playing with. Mixing power and signal is a bad idea. Also, electrification isn't going to be primarily battery - it's catenary. You are going to need some gov't help. Lobby for carbon offsets/tax/depreciation accel/whatever you can get. Just get going. Trucks are going to eat your lunch if you don't.
Oh, but Wall Street! Stop whining. You are getting paid big bucks to do the HARD WORK of explaining to investors how it's better for them in the long run to do this. Stop letting them whip you. Tell them how it's going to be and why it's good for them. Earn your money. Be a modern day Alexander Cassatt.
That is all. For now. https://blerfblog.blogspot.com/2023/12/how-to-kill-rail-renaissance-and-maybe.html
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
MidlandMikeI am hoping that the institutional investors have a long term view, but it seems they go along with the activist investors and Harrison type takeovers at CN, CP, CSX, etc.
As with most everything else, it depends on the institutional investor.
Robert Edens is an instutional investor and his investment in Brightline seems to be long term. Same is true of the BH investment in BNSF.
oltmanndThe two large markets not heavily penetrated by intermodal are I-81 and I-85/95.
The rails for I-81 through NY are mostly there - except containers can't cross the Thruway, essentially. CSX has the corridor north of Syracuse, but NYS&W owns it south, and there is no direct connection. Years ago there was a diamond, but it's long gone. The two railroads would have to figure out how to efficiently coordinate moving the cars through.
Binghampton would be another impediment, although I don't claim to know the routing there. And now we're going from NYS&W to NS to move on to Scranton.
Beyond that I haven't researched at all.
CSX built an intermodal terminal at Valleyfield, QC, but I don't think it's being used to capacity.
tree68 And now we're going from NYS&W to NS to move on to Scranton. Beyond that I haven't researched at all.
And now we're going from NYS&W to NS to move on to Scranton.
I know that the Reading & Northern runs a hotshot freight 6 days a week between the NS in Pittston (Scranton area) and North Reading. It's a bridgeline known as the NRFF (North Reading Fast Freight). It runs in both directions.
CMStPnP MidlandMike I am hoping that the institutional investors have a long term view, but it seems they go along with the activist investors and Harrison type takeovers at CN, CP, CSX, etc. As with most everything else, it depends on the institutional investor. Robert Edens is an instutional investor and his investment in Brightline seems to be long term. Same is true of the BH investment in BNSF.
MidlandMike I am hoping that the institutional investors have a long term view, but it seems they go along with the activist investors and Harrison type takeovers at CN, CP, CSX, etc.
I sure hope Brightline becomes profitable. As for BH, Warren Buffet is in his 90s, and when he is no longer in the picture I expect a feeding frenzy over BH.
Berkshire Hathaway has a market capitalization of $871 billion as of the close of the market on 08/12/24 and is likely to be the next trillion dollar company, as well as the first one that is not "Big Tech".
If the stock market has a correction, it will be the one doing the feeding.
They have a strong, strong bench behind Warren Buffett
Pick up some Berkshire Hathaway Class B shares if you want to jump on board The Buffett Train.
Here is a little bit about Berkyville, the BNSF layout that is at the Berkshire Hathaway annual meeting.
https://www.bnsf.com/news-media/railtalk/heritage/berkyville.html
oltmannd Another opportunity to sing my sad, sad song. (along with many others...) Carload ain't where it's at. It's shrinking. It's boutique business. The general purpose box car is dying. There are almost no reloads. Special purpose cars operating in dedicated lanes, empty one way, loaded the other are the rule. Large shippers. Large consignees. Think beer, drywall, scrap metal, trash. Optimizing the railroad to serve shrinking business is folly. The operating plan to serve this traffic was optimized in the early 2000's. DPUs led to another round of optimizing the train plan in the 2010s. That's it. That's all there is. Oh, and BTW, just because the law allows 11:59 of work on 8 hours rest doesn’t mean it’s a good business practice. Stop trying to optimize productivity by HOURS WORKED. Meanwhile, intermodal grows almost despite itself. If you can run the trains sort of reliably and have terminals and services in the right spots, the business will come. ...and it has. If you arrange your railroad to serve carload traffic and just try to squeeze in the intermodal as an afterthought, you're going to fail. The trains won't run. The service will be too spotty. So, the way forward is to optimize you plant for intermodal and TRY TO FIGURE OUT HOW TO MOVE THE CARLOADS STUFF IN THAT ENVIRONMENT! (maybe all caps will help?) The two large markets not heavily penetrated by intermodal are I-81 and I-85/95. Hello NS? Remember your Crescent Corridor idea? Wake it back up. 9 crews from Harrisburg to Memphis doesn't work. Fix it. Oh, by the way, if you want to be around in another 30 years, figure out how to do ECP and electrify. Hint, hint, it's not using the ECP stuff you've been playing with. Mixing power and signal is a bad idea. Also, electrification isn't going to be primarily battery - it's catenary. You are going to need some gov't help. Lobby for carbon offsets/tax/depreciation accel/whatever you can get. Just get going. Trucks are going to eat your lunch if you don't. Oh, but Wall Street! Stop whining. You are getting paid big bucks to do the HARD WORK of explaining to investors how it's better for them in the long run to do this. Stop letting them whip you. Tell them how it's going to be and why it's good for them. Earn your money. Be a modern day Alexander Cassatt. That is all. For now. https://blerfblog.blogspot.com/2023/12/how-to-kill-rail-renaissance-and-maybe.html
Carload business is shrinking, yet it continues to command better margins than intermodal...why is that?
UlrichCarload business is shrinking, yet it continues to command better margins than intermodal...why is that?
Because it is a niche business. Intermodal has progressed from a niche to volume business.
So when carload freight dominated (40 plus years ago) the margins on it were lower?
UlrichSo when carload freight dominated (40 plus years ago) the margins on it were lower?
Trains like the Super C and BSM lost much if not all of their ability to command a price permium over the end-to-end service that TOFC/COFC could provide in a world of ubiquitous truck access. o if you needed faster, or more secure, or more convenient service you paid for intermodal, not some carload kludge, except in specialty niche markets requiring more effort than most railroads cared to put into the game (cue greyhounds).
What's happened more recently is that stack COFC has become commoditized: there is no longer much of an emphasis on speed (at least not in the East) where it is not financially beneficial; there is less importance on JIT management, scheduling, and delivery (which is the thing that replaced high end-to-end speed as a business desideratum); there came to be more perceived value in assured block-length or train-length volume, with the vendors understanding that they could exact lower per-unit pricing for that assurance of volume. Accordingly many 'margins' for COFC have dropped to commodity levels, on the order of what we've seen for bulk service like coal unit trains. "Carload margins" have little if anything to do with this (except that we've seen instances where organized 'carload' service, like the UP cold train service to Rotterdam, is abandoned for not being worth what the revenue provided).
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