To back up the point Sam 1 is making in this Thread :"... [snip]Translating average revenue per employee into average income per employee, i.e. how much each employee delivers to the bottom line, the average amount of revenue flowing through to average net income was 17.9 per cent. UP topped the list at 21 per cent, followed by Kansas City Southern at 18.6 per cent. The others ranged from 14.7 per cent to 17.2 per cent.
America’s Class 1 railroads continue to turn-in impressive financial numbers. As well as the ratios shown above, there are numerous other indicators that the railroads are meeting or exceeding investor’s expectations. Which raises an interesting question? Would merging the Class 1s into two or three mega systems really generate a better outcome? I think not.
In another Thread in this Forum: "AOKX Covered Hoppers inTexas Normally Carry"
linked @ http://cs.trains.com/trn/f/111/t/215360.aspx
Is the following statement which seems to back up exactly what Sam 1 is saying: FTL ( quote: jeffhergert)[snipped] "...There's a lot of frack sand moving from Wisconsin and Minnesota points to Texas right now. If the propaganda we have been told is true, the profit a certain railroad is making on each car load of sand is $4500. The revenue from one sand train equals the revenue of three coal trains. (Which might explain why they aren't as upset at losing coal business.)..." [snipped]
Sort of an interesting take from different resources for facts on how, and why the railroads seem to be performing so well, in what seems to be a sluggish enconomy for the rest of us....
Sam1, thanks for the interesting and impressive numbers in your post.
I have been looking at industry performance for the past 10 years from a variety of angles in order to understand how the recent superior financial results were achieved, and I believe the insights may be of some interest, and even a bit surprising. (My analysis used annual SEC 10-K reports for the four “Majors”: BNSF, CSX, NS, and UP.)
Pricing power emerged (or was finally recognized) around 2003, and has largely propelled strong financial growth. Volume growth has long been seen as the sine qua non for railroad profit growth (aka, leverage), but on a unit-count basis, the period 2003 through 2013 saw almost none, yet profits soared. Only BNSF and NS had positive unit-count growth (+1.6% and 0.7% CAGR respectively) over the 10 year period, with CSX declining at a -1.1% rate and UP at -0.2%. The combined growth rate for the 4 “Majors” was a mere +0.3% CAGR.
Further, the traditional view has held that volume growth combined with tight cost control was a combination sure to generate growing profits and returns on the measures you have cited. So, what about Operating Expense trends? Looking still on a unit-count basis, one might conclude that cost control wasn’t so tight: For the 10 years (2003 as base), the Majors’ Operating Expense per unit grew at +4.3% CAGR. (Realistically, though, one must recognize the very large impact of rising fuel expense, especially in the last four years or so.) The range was from BNSF @+5.2% per unit to NS @+3.3%. If one were to gauge the industry against the general inflation rate for the period, 2.10% (Implicit Price Deflator), and factor in the lack of volume growth, it might appear that returns should have suffered greatly. Not.
So what happened? Pricing power. I look at the story this way: From the passage of the Staggers Act in 1980 until the final consummation and rationalization of the mergers of the 1990s, which occurred during the period 1998-2002, the industry was plagued by two realities: 1. Excess capacity, and 2. Exuberant (irrational?) price competition among railroads in an attempt to fill that capacity. Ironically, as well, there were major senior management transitions at about that time (2000-2002) which brought to the fore a new generation of managers that understood that 20 years of post-Staggers enthusiasm for “rate freedom” was no longer serving the industry well.
“Duopoly” entered the railroad pricing lexicon.
The results have been dramatic: For the 4 Majors as a group, Revenue per Unit increased an average of $908 (+85%), CAGR of +6.3% over the 10 year period. Individually, BNSF: +7.0%; CSX: +6.1%; NS: +5.0%; UP: +6.7%. When viewed against these figures, the growth of Operating Expense by +4.3% was “modest”?
Well, the traditional “figure of merit” in the industry is, as we all know, the “Operating Ratio”: Operating Revenue divided by Operating Expense times 100. The net impact of the two trends I have noted above resulted in these “OR” figures over the 10 year period:
4 Majors BNSF CSX NS UP
2003 86 83 91 84 85
2013 70 70 71 71 70
(Disclaimer: There are a host of variables hidden in the figures I have used. Perhaps most notable, is the effect of “traffic mix”. This includes shifts in the proportions of commodities hauled, weight per car, length of haul, increasing proportion of unit-train volumes, etc. Only if all such factors remained essentially unchanged might one reasonably assert a very high degree of “accuracy” in assigning “price level” as the sole driving factor of change over the 10 years.
(Two significant examples of significant change: Coal volumes for CSX and NS dropped sharply (-2.7% and -1.8% CAGR), but their revenue per unit of coal leaped +9.4% and +7.4%. For BNSF, the surge of very high revenue-per-unit Crude-By-Rail since 2010 probably accounted for about one-fourth of volume growth over the 10 year period, and a more than proportionate increase in revenue-per-unit.
(Having acknowledged that reality, I concede that my analysis is ultimately simplistic. Only if one had access to voluminous internal data could one begin to make a more accurate analysis. And yet …. The continuing, if fleeting, references by senior executives of the carriers to pricing strategies consistent with my analysis convinces me of its directional validity.)
466lex but on a unit-count basis, the period 2003 through 2013 saw almost none, yet profits soared. Only BNSF and NS had positive unit-count growth (+1.6% and 0.7% CAGR respectively) over the 10 year period, with CSX declining at a -1.1% rate and UP at -0.2%. The combined growth rate for the 4 “Majors” was a mere +0.3% CAGR.
When you say "unit-count" what units are you counting? Tons, ton miles, carloads, or something else?
Loads.
466lex:
I appreciate your analysis. It goes beyond the numbers I put up. I was looking at the current financial performance from an investor's point of view. I own directly or indirectly shares in all seven Class 1s.
Knowing the macro effectiveness of each road, as you point out, would require an insider's look at the books - operational and financial.
Revenues are a function of rate times volume. So too are expenses. As long as a company can grow the revenues faster than its expenses, i.e. marginal over marginal, it will generate more ROE.
Having spent 41 years with several Fortune 250 corporations, I am savvy enough to know that a bit of luck rides with every successful corporation.
At the end of the day, irrespective of how they have gotten to where they are, America's Class 1 railroads are a class act. They are a prime example of the benefits of a competitive, market based system albeit one that is regulated properly, i.e. health, safety, level platforms, etc.
466lx:Thanks for your detailed discussion. I appreciate the time and effort you put forth. There are several bits of financial data which I look at for railroads. First and foremost is the cash flow statement and how much free cash flow (cash flow - cap ex) is generated compared to the total revenue. A rule of thumb established by Pat Dorsey in his book "The Five Rules for Successful Stock Investing" is that a company that generates 5% of revenue to free cash flow - "is doing a solid job." CN (CNI) free cash flow/revenue is 14.9% compared to 19.3% for Johnson and Johnson17.1% for Coca Cola, 15.3% for McDonalds, 12.2% for Proctor and Gamble, and 10.4% for GE. CN is generating enormous amounts of free cash flow in an industry which demands a high level of capital.
Think about this....CN invests roughly 19% of their revenue (NOT PROFITS) into their business every year, basically to generate moderate growth.
I also like looking at units handled, in this case the number of carloads or intermodal units handled. The trend is your friend as is often said. What is happening with the number of carloads handled? Where is the growth? Where is the drag? Obviously coal is dragging and petroleum and intermodal are growing. Rails are fortunate to command huge revenues on oil movements these days. Part if this is due to the risk of handling, but another reason is (as 466lx pointed out) there is a new breed of managers. The pricing is not due to costs, but what the market will bear. There is no other way to move this oil (at this time). Therefore...pay up. On the other side, coal is seeing declining revenues per carload. CSX reduced average carload revenue by 9% on coal. Why? Coal is competing against other forms of energy, primarily natural gas. The CSX managers understand they must make concessions in order to keep the business. If coal goes away, then the infrastructure in West Virginia will likely become "rails to trails". The weekly carloads are very interesting to follow. These are available on all railroad websites.
Revenue per carload (or unit) is important, as discussed above, far more so that revenue per ton. Why? Autos and auto parts weigh very little. The railroad generates revenue based on carload movements, not tonnage.
We have had quite a series of discussions over at Fred's Corner on the serious capacity issues with the industry. I am not so sure there is an issue quite yet. Why? What happens if all this oil moves to pipelines? Then about 10 trains daily comes off of the NS Chicago line and a similar number from the CSX - Chicago line. Suddenly the capacity issue is not quite as severe. Pipelines are being built to handle the oil and the Saudi's have declared war on US shale drilling, thus oil prices are dropping like prom dresses ( in my teenage dreams).
Good managers know how to properly allocate capital. The best companies in the world do this quite well (Exxon Mobil, Johnson and Johnson, etc). Eventually railroads will have to address capacity as the economy continues to grow at a slow pace of 3% annually. Recall the number of trains running on your favorite segment of track 25 years ago compared to today and you will see the effect of 3% yearly growth...plus reduced capacity.
Intermodal will be growth, but there is very little pricing power in that line of business. Coal will have to be slowly replaced. With oil? Fracking sand? Boxcar freight? It will be interesting to see how the commodity mix evolves and the finances of the industry are in 10 years.
Ed
Thanks to all for a meaty discussion. I will add an impressionistic note.
As one who suffered along with my favorite industry for the first several decades of my life, I am hugely gratified by its performance in the last couple of decades. As an investor, I got on board about 10 years ago and have been well rewarded.
At the same time:
A few days at a hotel beside I-35 in Texas last month showed me who is still king of everyday transportation. I'm a light sleeper, and out my window, in the middle of the night, there were never fewer than 3 tractor-trailers in sight at a given time. During the day, there would be at least 5 within the half-mile or so my view commanded.
The trailers were not the 20-foot containers we associate with last-mile delivery but the 53-foot dry boxes.
In short, for most Americans, it's still true that, "If you've got it, a truck brought it." In spite of trucking's problems with hiring, infrastructure and tightened regulation. There's still a world of opportunity and cash out there sailing past the oil, grain and coal drags and, yes, the stack trains too.
It could be the past and present will continue into the future, with plenty to go around for both modes. And it's true the rails seem to have their hands full with their present allocation.
As a fan, I would simply enjoy seeing my favorite industry return to a place of more visibility and immediacy to the general public. And make a whole lot more money in the bargain -- money that belonged to it in the first place.
I like the revenue per employee benchmark. It nicely encapulates why small business often has the edge. $500,000 per employee is good... but I (and many of my peers) operate at well over a $million per employee. Sometimes raw efficiency beats economies of scale, hence the large number of trucks you see on the road, many of which are run from a basement office of a modest home.
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