(The following column by David Silver appeared at SeekingAlpha.com on March 11.)
NEW YORK — Shhh! If you listen carefully, you can hear it coming, that whistle in the distance. Everyone knows that annoying feeling you get when, as you are driving down the road, you hear “ding ding ding” and see the red lights flash and the barrier block your path across the railroad tracks. It always seems to happen when you are in rush, too.
The fact remains that more freight is shipped via rail than via any other type of transportation in the country and the industry is beginning to reinvest in its the infrastructure. Since 2000, more than $10 billion has been spent on improving rails, widening tunnels, laying new tracks, and improving the efficiency of the overall railroad infrastructure. Also, management teams across the industry have indicated that another $12 billion is currently earmarked for capital investments.
Despite the recent stock market volatility, all the talk about a recession, and record oil prices, transport stocks (and rails in particular) have shrugged off all the negative banter and performed well. Since bottoming out in the second week of January, the Dow Jones U.S. Railroad Index [$DJUSRR] has been on a tear as the majority of companies in the industry surpassed the Street’s earnings expectations in the most recent quarter.
All day long, the talking heads on TV continue to talk about the pending doom of the U.S. economy and about whether the monetary and fiscal changes will be enough to stave off a recession. One analyst even commented he thought we were at the beginning of a depression (don’t know what economic data he is looking at). However, despite all the talk, total carloads and total ton-miles are up 1.4% and 2.5%, respectively, in the first 8 weeks of 2008. Below are the biggest movers in terms of commodity performance year over year:
* Grain and Farm Products are up 17.0% and 27.8% year over year, respectively
* Inline with the commodity boom, Metallic Ore shipments are up 20.5%
* Primary Forest and Lumber & Wood Products declined 13.7% and 22.7%, respectively
* Total carloads increased 1.4% to 2,527,679 from 2,492,172
* Total intermodal units declined 3.0% to 1,738,760 from 1,793,271
* Estimated ton miles increased 2.5% to 261.2 billion from 254.8 billion
We continue to view shares of this industry positively and feel that the strong capital investment as well as an improving economy will bode well for the railroads. For the full year 2007, shipments were down, but still recorded the second best result ever, behind only 2006. We are looking for 2008 to be another strong year, with continued pricing increases and improving volume trends that will help to offset the record high price of oil. Additionally, the railroad industry should be among the first to respond to the recent actions by Federal Reserve Chairman Ben Bernanke, who has cut short term interest rates by 225 basis points since August 2007.
The railroad industry is considered one of the bellwethers for the economy, and the strength over the past few months would normally give investors a calm feeling with respect to the future of the economy. However, that is far from the case currently as volatility and fear have become commonplace in the market.
We have a bullish stance with regards to the entire railroad industry, and our two favorites in the industry are CSX Corp. (CSX) and Burlington Northern Santa Fe (BNI) as they have superior management teams and are positioned extremely well in the event that the economy actually does slip into a recession, in addition to being at the front of the line to benefit when the economy accelerates again. Over the past year, CSX has been the best performing railroad, with its share price gaining 34.5%, and we still see strong upside for the stock through its strong intermodal shipments as well as its coal presence on the East Coast.
Over the same time period, BNI’s share price has gained 15.6% and gained the Oracle of Omaha, Warren Buffet, as a large shareholder. Berkshire Hathaway (BRK.A) (BRK.B) currently holds approximately an 18% stake in BNI and has consistently bought shares below the $80 price level. It makes you wonder if he knows something the rest of us don’t.