Rail Renaissance: Returns, Capital & Capacity AB HATCH [email protected]@mindspring.com...
35
-
Upload
raymond-abel-elliott -
Category
Documents
-
view
223 -
download
0
Transcript of Rail Renaissance: Returns, Capital & Capacity AB HATCH [email protected]@mindspring.com...
Railroads at historic tipping point
The Railroad Renaissance is here – will it last? Capacity issues across all modes – or so we thought? Volume increasing – right? Share, rates, service levels (yes) – and returns increasing But pushback (shipper/regulator/union) also increasing! A secular, not a cyclical story – right? Capacity and infrastructure – and competitor - issues remain Fully reflected in the market? Or is this just another cyclical
slowdown? NET/NET- The industry is poised to go up – or down –
based on decisions made here & now
Railroad PerformanceClass I Railroads
0
50
100
150
200
250
300
64 68 72 76 80 84 88 92 96 00 04 08p
Index 1981 = 100
Source: Railroad Facts, AAR (Based on a design by R. Gallamore)
Productivity
Volume
Revenue
Price
Street influence on RRs – and Why that affects ALL stakeholders
Battle for cash
Management’s reactions to pressures
Investors, competitors, regulators, politicians,
labor – oh, yes, and customers
Short term decisions/long term consequences
Remember 2004! (?)
Which “bucket” will they place their chips?
Simple Math
RatesReturnsCapital ExpendituresCapacityService
ARE ALL CONNECTED!
Virtuous Circle (’03-07) or Disinvestment?
Key Class1 Issues in Recession ‘09
Re-regulation Bigger Threat than EverRates (versus Volumes)The EconomyServiceGreen RamificationsStimulus, MAP21, ATRK, “High” Speed
Rail (ONERail)
New Sources of Capital – Threat or Opportunity?
Fortress-RailAmerica/FEC (etc)
Infrastructure Funds (Toll Roads)
Hedge Funds & “Activists” (TCI)
PPPs – Heartland, Nat’l Gateway, CREATE
Share repos
C-1 Buyouts (DM&E)
JVs – Meridian, Patriot corridors
Threats to the Renaissance
Cyclical vs. secular argument New Congress –impacting labor & shippers Mandated Reviews – STB, Canada Rereg – the MAD answer Execution: service Execution: merger Hedge funds? Liquidity?
Cyclicality – Rails & Suppliers
What happened to the “end of the cycle”?
Thinking strategically vs. tactically?Panic Mode?Passenger the new lead dog?
North – or South – of the Border
Canada as the new model for rail regulation? NAFTA review? The “J” (& The MidAmerican, etc) Auto Restructuring Customs/Border issues Detroit tunnel? Rebirth of passenger rail? RR Days on the Hills
S&P 500 and RailroadsMonthly Data January 1980 – April 2007
Index Jan. 1980 = 100
Sources: MSN and CSI, Inc.
0
200
400
600
800
1000
1200
1400
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
S&P500 Railroads
07Q107Q2
07Q3
07Q408Q1
08Q2 08Q3
08Q4
09Q1-18%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
Change in U.S. Railroad Non-Intermodal Carloads
Source: AAR Weekly Railroad Traffic
07Q1
07Q2
07Q3
07Q4
08Q1
08Q2 08Q3
08Q4
09Q1
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Change in Canadian Railroad Non-Intermodal Carloads
Source: AAR Weekly Railroad Traffic
07Q1
07Q2 07Q307Q4
08Q1
08Q2 08Q3
08Q4
09Q1-18%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
Change in U.S Railroad Intermodal Units
Source: AAR Weekly Railroad Traffic
07Q107Q2
07Q3 07Q408Q1
08Q2 08Q3
08Q4
09Q1-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Change in Canadian Railroad Intermodal Units
Source: AAR Weekly Railroad Traffic
Railroad Intermodal Revenue Growth Over 5% - Long Live the New King!-
19901995
20002005
.
$0
$2
$4
$6
$8
$10
$12
$14
Bil
lion
s
Source: Carload Waybill Statistics (includes non-Class I railroads)
Coal Intermodal
17%18%
19%20%21%
22%23%24%
25%26%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Coal Intermodal
*Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports
Intermodal and Coal as a % of Revenue*
Intermodal was the Top Source of U.S. Freight Rail Revenue, but Coal will be Number 1 in 2008
U.S. Railroad Intermodal Traffic(millions)
0
2
4
6
8
10
12
14
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
U.S. Railroad TOFC/COFC Units
Source: Association of American Railroads’ Weekly Railroad Traffic
U.S. Railroad Intermodal TrafficTrailers vs. Containers (millions)
0
1
2
3
4
5
6
7
8
9
10
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
U.S. Railroad TOFC Units U.S. Railroad COFC Units
Source: Association of American Railroads’ Railroad Facts
Intermodal Growth DriversDomestic and International
Globalization
Trade
Railroad Cost
Advantages
Share Recovery
From Highway
Truckload Issues
Railroad Return on EquityClass I Railroads
0%
2%
4%
6%
8%
10%
12%
14%
91 93 95 97 99 01 03 05 07
Source: Railroad Facts, AAR
n.m.n.m. = not meaningful (negative value)
RR CoC vs. ROIC – RR Stocks have done well but… they still trade at a discount to all stocks
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08p
Cost of Capital Return on Investment
Source: Surface Transportation Board Note: Cost of equity estimation method changed by Board effective 2006 and 2008.
Railroad Capital ExpendituresClass I Railroads
$0
$2
$4
$6
$8
$10
$12
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Billions
Source: Railroad Facts, AAR
-$2
$0
$2
$4
$6
$8
$10
$12
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Source: Association of American Railroads
Net Income
Capital Spending
Class I Railroad Capital Spending vs. Net Income
(Current Dollars)
RRs and Investment
Is growth affordable? Capex up 10% in ’07, up 12% in ’08, so far only down 5-10% for 2009F
One rail cuts, most increase capex during ’07 What will 2010 look like? (long term growth
v short term weakness) Is additional capacity necessary? Desirable? Can the intermodal model extend to carload? Wall Street’s constrictive role (“fighting the last
war”) – is it changing? Is this disconnect between the Renaissance and
the Street the opportunity of a lifetime?
0 10 20 30 40
2035p
2002
Future Demand for Freight Transportation Will Continue to Grow
p – U.S. DOT projection
Billions of Tons of Freight Transported in the U.S.
Future Corridor Volumes Compared to Current Corridor Capacity
2035 without improvements
Below capacity
Near capacity
At capacity
Above capacity
Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm
01234567
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07
Cents
Source: Railroad Facts, AAR
Current $: Up 17% since 1980
Constant $: Down 49% since 1980
150,000
152,000
154,000
156,000
158,000
160,000
162,000
164,000
166,000
168,000
170,000
2001 2002 2003 2004 2005 2006 2007 2008
Total Class I Employment: Jan. 2001-Nov. 2008
Rail Employment is Up for the First Time in Decades
Source: Surface Transportation Board
Railroad Employee ProductivityClass I Railroads, Ton-Miles Per Freight Service Employee
0
2
4
6
8
10
12
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Railroad Facts, AAR
Millions
Rail Service Cycles
Is the recent improvement in the metrics
sustainable? Systemic?
Is it a product of huge capex injection
and IT?
Or, is it merely a product of lower
volumes/less stress on the network…
Rail Regulatory Risk
Biggest Uncertainty Entering ’09 Safety Bill done “Competition” Bill (“M-A-D”) vs Anti-Trust STB makes it 3-straight shipper “wins” Rocky & The Dark Star – new horror movie? Cost of Capital Revision shock Mandated STB, CTA “Reviews” AAR/RAC/ASLRRA have great “D” but hard to
score on defense
25% tax credit for projects that expand rail capacity
Expense other infrastructure capital expenditures
Leverage private investment
Tax Incentives to Leverage Capacity Expansion
RR/Investor Issues Summary-3Rs3Cs
Recovery?The Re-SetRe-RegulationCapital NeedsCapital CooperationCash Flow
ABH ConsultingAnthony B. Hatch155 W. 68th StreetNew York, NY 10023(212) [email protected]
