U.S. Railroads Well Positioned for Upturn, Moody’s Says

Railroads should pick up market share from trucking companies as economy improves.

Moody’s appears to concur with major investor Warren Buffett’s long-term view of the US railroad industry (or is it the other way around?). On the heels of further reducing Berkshire Hathaway’s (BRK.A) holdings in the ratings agency, Buffet is making a huge bet on the railroad industry through Berkshire’s acquisition of Burlington Northern (BNI).

In its timely annual Industry Outlook, Moody’s says that “While the worst appears to be over for the railroad sector, it will be a long road back to the industry’s peak activity levels. Thus, the stable outlook for the North American railroad industry anticipates a slow recovery of depressed freight volumes during the next couple of years.”

“There is unlikely to be a meaningful upswing in demand until employment levels rebound, housing stabilizes and capital investment picks up,” said Moody’s Vice President-Senior Credit Officer David Berge.

Overall, railroad freight volumes are expected to recover slowly from their cyclical trough, with carloads up 5% to 8% in 2010 and 10% in 2011, the report said.

The railroads are poised to pick up market share from truckers in an upturn because they have continued to spend significant amounts on infrastructure investments while trucking companies have slashed capital spending to cope with reduced volumes.

In the process, railroad operations have become more nimble and cost-efficient. When an upturn takes hold, they should be able to bring excess capacity to bear quickly. Trucking companies have not been investing in equipment, systems and training, and therefore will be less able to respond to increased demand.

Although there has been an improvement in industrial categories such as metals and chemicals, demand associated with consumer goods, housing and automobiles is likely to remain weak. In addition, coal shipments, which are highly profitable for railroads, will be hampered in the near term by high inventories at electric utilities.

“Railroad freight volume is a leading indicator of economic activity, as volumes tend to reflect positive trends in the re-stocking of inventories and feedstocks that precede growth in industrial output,” Berge said.

According to the report, railroads’ pricing power should hold up due to service improvements and repricing of unfavorable legacy contracts despite pressure on demand.

The industry has the capacity to handle an unexpectedly strong increase in demand, said Berge, which is an operating condition that has not always been characteristic of this industry in periods of demand recovery. “Since demand is only expected to recover at a moderate pace, network congestion is unlikely to be a major concern over the next few years.”

For details see North American Railroads Poised for Slow Recovery.

For latest analyst comments on Burlington Northern see Alacra Street Pulse.

For a transcript of the conference call on the deal, click here.

Comments

[Mad Hedge F...:]

nhy You’ve got to hand it to Warren Buffett, who never does anything half heartedly. The stunning news that he is paying $44 billion for the 73.4% of Burlington Northern Sante Fe (BNI) he doesn’t already own, a 30% premium, had punch drunk traders picking themselves off of the floor. The other rails rocketed, like Union Pacific (UNP), CSX (CSX), and Kansas City Southern (KCSR). The deal is the Oracle of Omaha’s largest in his career, and took the BNI board all of 15 minutes to approve. For me this deal speaks volumes about the long term trends in the US economy as seen by its greatest investor. It screams Commodities! Commodities! Commodities! Rails can only prosper moving bulk freight from the heartland to ports on the three coasts, which foreigners are buying in ever larger quantities at ever higher prices. It also says the coal industry isn’t going anywhere soon, as it accounts for 70% of all rail traffic. Buffet let loose of some fascinating statistics about the enormous productivity increases the industry has accomplished. In the last 25 years, it cut employment from 500,000 to 175,000, while increasing freight by 60% and reducing track by 40%, and now accounts for 40% of the total goods moved in the country. Railroads are the greenest transportation out there, a ton of freight requiring only a gallon of fuel to move 470 miles. When I was growing up, my big goal in life was to become a train engineer. Maybe it’s time for me to revisit that aspiration. And I promise not to text while driving!

Nov 03 07:50 PM

[wallyjm:]

use railroads and get more of those dam trucks off the roads.

Nov 04 01:08 PM