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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 08
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 ‘10
Re-regulation Bigger Threat than EverRates (versus Volumes)The EconomyServiceGreen RamificationsStimulus, MAP21, ATRK, “High” Speed
Rail (ONERail)PTC-”unfunded”- and unknown -mandate
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?
Warren’s $44B “all-in” bet
Advantages of going private? (capex cycle)
Influence in DC“Robber Baron” vs. “Sage”Bets not (just) on economy – rereg, coal,
western intermodalBought on the cheap!
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
09Q2
09Q3
09Q4e
-25%
-20%
-15%
-10%
-5%
0%
5%
Change in U.S. Railroad Non-Intermodal Carloads
Source: AAR Weekly Railroad Traffic
07Q1
07Q2
07Q3
07Q4
08Q108Q2 08Q3
08Q4
09Q1
09Q2
09Q3
09Q4e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Change in Canadian Railroad Non-Intermodal Carloads
Source: AAR Weekly Railroad Traffic
Grain TrafficMajor U.S. and Canadian railroads
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Combined U.S. + CanadianAverage Weekly Rail Carloads of Grain
2006
2009
2008
Data are weekly average originations for each month, are not seasonally adjusted, and reflect revisions from original reporting. Source: AAR Weekly Railroad Traffic
2007
Jan. 2010
Source: AAR Railroad Time Indicators, February edition, page 12
Grain TrafficMajor U.S. and Canadian railroads
Source: AAR Railroad Time Indicators, February edition, page 12
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Combined U.S. + CanadianAverage Weekly Rail Carloads of Grain
2009
2008
Data are weekly average originations for each month, are not seasonally adjusted, and reflect revisions from original reporting. Source: AAR Weekly Railroad Traffic
2007
Jan. 2010
Grain Tonnage 2008Class I Railroads
Corn51%
Soybeans15%
Sorgum Grains
2%
Barley2%
All Other3%
Wheat27%
Tonnage
Corn 75,810,216Wheat 40,434,205Soybeans 22,049,468Sorgum Grains 3,718,586Barley 3,043,311All Other 3,923,866 Total 148,979,652
Intermodal Growth DriversDomestic and International
Globalization
Trade
Railroad Cost
Advantages
Share Recovery
From Highway
Truckload Issues
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 09e
U.S. Railroad TOFC/COFC Units
Source: Association of American Railroads’ Weekly Railroad Traffic Year 09e week 52 is estimated
07Q1
07Q2 07Q3 07Q408Q1
08Q2 08Q3
08Q4
09Q1
09Q209Q3
09Q4e
-20%
-15%
-10%
-5%
0%
5%
Change in U.S Railroad Intermodal Units
Source: AAR Weekly Railroad Traffic
Long-run Railroad Intermodal Revenue Growth Has Outpaced Coal (Short-run has not)
1990 1995 2000 2005.
$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%
98 99 00 01 02 03 04 05 06 07 08
Coal Intermodal
*Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports
Intermodal and Coal as a % of Revenue*
Coal and Intermodal are the Top Sources of U.S. Freight Rail Revenue
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 09e
U.S. Railroad TOFC Units U.S. Railroad COFC Units
Source: Association of American Railroads’ Railroad Facts Year 09e week 52 is estimated
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 08
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)
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
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?Rocky&the Darkstar
STILLSTILL Biggest Uncertainty Entering ’10 Safety Bill done/UTU influence “Competition” Bill (“M-A-D”) vs Anti-Trust And yet,STB makes it 3-straight shipper “wins” Cost of Capital Revision shock Mandated STB, CTA “Reviews” AAR/RAC/ASLRRA have great “D” but hard to
score on defense Compromise or fight? Quid pro quo in the
future?
Rocky & The Dark Star – new horror movie?
Just ONE example of a “future consideration”
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
Developing website
www.abhatchconsulting.comTopShipper SurveyRailTrends 2010 September 28-29
ABH ConsultingAnthony B. Hatch155 W. 68th StreetNew York, NY 10023(212) [email protected]
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