Class I Stock Prices and Takeovers?

We have never really discussed rail valuation here too much, i.e. we're not a Yahoo! Business stock forum. But I found this article interesting. What I found most interesting, especially in the light of the Genesee and Wyoming G&W acquisition of Rail America, was the idea that CSX, the Chessie come B&O come Conrail etc. east coast behemoth, could be a takeover target?

I guess if it could happen to BNSF, it could happen elsewhere, although I don't see a combination with another railroad. What about like-kind-exchanges (LKE) (Mssr. Norman

Thoughts?

CSX A Possible Takeover Target, Buy Alongside Union Pacific, Norfolk

One thing I request; if you take a pro or con position, please disclose any ownership.

Edit: I would also note that I currently hold no positions in railroads.

Disclaimer: railroad.net, it's owners and moderators make no recommendations and offers no advice as to stock ownership OF ANY KIND OR IN ANY FORM (stocks, bonds, retirement accounts, or pennies on tracks). It is up to you do your own research to confirm or refute what you may read here, and make your own decisions.

CSX

CSX has become the most popular railroad stock on the market, as evidenced by its greater volume. It is also the cheapest on a multiples basis with a respective 12.8x and 11x past and forward earnings. The dividend yield of 2.5% also helps to offset some of the heightened volatility. Like for Union Pacific and Norfolk, I also recommend buying shares.

Whereas Union Pacific's tracks cover all of the region west of Michigan down to Mississippi, CSX covers veering to the East. The latter's tracks are generally denser and, in some cases, this leads to unnecessary costs and, in other cases, this leads to more intricate deals. At a valuation of $11.9B, I believe the firm is a possible takeover target. Antitrust regulators may have some problems with any arrangement, but there is a strong case to be made about industry value creation from wider nation-wide connections.

Sidebar: I will "Global" this for 7 days, and then park in Class I

disclosure: long shares of CSX (no other RR in my portfolio, used to have Norfolk Southern and BNSF)

When analyzing shares of the class Is, I hardly ever consider any prospective M&A, since it won't provide much benefit in terms of economies of scale (when short lines merge, they get a greater benefit due to more overlapping costs). Warren Buffett's purchase of BNSF was actually bad for it's current shareholders, who were planning on holding on for the long-term (like me) as the gains over the next 5 years or so would have been much greater than the short-term gain given by Buffett.

Nearly all the Class Is are good investments right now, with CSX offering the best valuation/growth, even given it's exposure to coal.

Possibly this chart can help formulate discussion, which in view of my disclosures, I will decline further participation:

http://investing.money.msn.com/investme ... nocookie=1

disclosure: author holds long positions CSX KSU UNP; author is a Retired CPA, but who never held licensure to give investment advice.

Allow me to note that at various topics in the Class I Forum, I have addressed issues that I believe could be a "red sky in the morning sailors take warning' for the industry. Two words: Coal and PANAMAX

I would think any RR combinaton would be an east-west merger to generate a true intercontinental railroad that Jay Gould wanted. If you got a merger between one of the east-west giants, the other east-weat pair would have to merger to stay competitive. KCS competes north south with CN and you have two railroads east-west. Shortlines feed the big boys.

I don't see anybody taking major positions in a Class I like Buffett did. Hey I could be wrong but the business is too capital intense for anyone to sink big money in. The plan is always to get in, get rich, get out and that's tough to do in this business.

Gilbert B Norman wrote:Possibly this chart can help formulate discussion, which in view of my disclosures, I will decline further participation:

I would hope that you would participate, but I understand. I'm not looking for pure unabashed objectivity; I just think a thread in here, amongst people knowledgable about railroads, is better than a thread in Yahoo! Business with paid trolls.

I'm going to edit the first post to add a disclaimer; oversight on my part not to have put that in.

BNSF News: http://www.bloomberg.com/news/2012-08-0 ... eight.html

Aside from the BNSF News, some industry notes as well on frikken frakking:

Double-Edged Sword’

Union Pacific’s shale business will probably grow to almost 400,000 carloads in 2012, Chief Executive Officer Jack Koraleski said on a July 19 conference call. That’s roughly double the number of carloads the Omaha, Nebraska-based company moved from the Bakken shale formation in the northern U.S. in 2011.

“While the coal business, which is our largest book of business, has softened, we’ve been able to offset that with strength in crude oil, in frack sand, in automobiles, in pipes and domestic intermodal,” Koraleski said in a telephone interview last month.

BNSF and Union Pacific transport most of their Bakken region crude shipments to Oklahoma, California, Louisiana, New Mexico and Texas. The companies are more insulated from risk associated with the abundance of natural gas than eastern rails since coal in the Powder River Basin of Wyoming and Montana costs less to mine than in the Appalachian region.

I am long on CSX as well. However, this is a tough field to predict takeover possibilities.
It would be very interesting to see how the courts would interpret anti-trust legislation in view of a possible merger between CSX and another large class 1 domestic railroad.
My strong suspicion would be that it would not be allowed.
If AT&T couldn't make their acquisition of T-mobile on anti-trust grounds, I can't see how CSX would fair better unless we're talking an international player.
My two cents..

Still no positions......

The Verizon/Alltel merger was a tough nut to crack, but there were a lot of sub or after market operators, a lot of spinoffs, and the Alltel brand survives. I could see why T-Mobile and AT&T failed, though I think it should have been allowed as you still have three major operators.

In the Verizon case there were tons of spinoffs and sales of markets. I'm not sure how many "Grand-Trunks" BNSF and UP have west of the Mississippi, but could those be sold off?

Not to mention, the "Grand Trunks" have competition off the rails in the form of trucks. I'd be more concerned if they started pulling a Charles Mellen/JP Morgan and buying up other modes of conveyance.

Greg Gormick suggests a CP-KCS merger for connections from Mexico to Canada.
http://www.thestar.com/opinion/editoria ... -quick-fix

Rumours abound about a fire sale of CP assets. The previous management team let the eastern end of the system wilt and become competitively inferior to CN. As a result, one scenario has CP selling its lines east of Thunder Bay to short lines or U.S. railways. A CP system without a strong eastern component is, in the opinion of many industry insiders, unsustainable.

But there is another course that should be pursued by Ackman, faint hope though it may be. He could send in a management team that truly understands the game of railroading and will lead him to the opportunities still awaiting a railway with a continental vision. The most obvious is a merger or takeover of the Kansas City Southern, which stretches from Kansas City — where it connects with CP — all the way to Mexico’s industrial heartland. This would create a three-nation NAFTA system that the other large railways would find impossible to match.

Regarding coal, oil and frack sand:

While there is currently a shortage of railcars for hauling frack sand, I expect that a sufficient number of new covered hoppers will be built by the end of the year to meet the demand. The hydraulic fracturing is done at the completion of each well, and while there is a current backlog of about 6 weeks of drilled wells, the number of drill rigs operating is fairly stable. Frack sand is a growth story for 2012, but then it will level off. Don't look for big gains in 2013. If oil prices drop below $80 per barrel, the number of operating drill rigs could taper off.

Oil has a better future. Deliveries for oil tank cars stretch out for 3 years or more. Domestic oil production should increase by about half a million barrels per day in the next 12 months, and half a million barrels per day the year after. How many years into the future? Increasing each year for the next 20 years is possible.

But hauling oil by train is a temporary measure. Pipelines are more efficient. Right now oil production is increasing faster than pipeline construction can handle it, but economics favors pipelines in the long run.

Coal is primarily used for generating electricity. Historically, building natural gas power plants is quicker and cheaper, but historically natural gas has been a more expensive fuel. This year, natural gas has been very cheap and power companies have been turning to natural gas generators to the maximum extent possible. Exploration companies have responded by drilling fewer gas wells and more oil wells. LNG terminals are being readied for exporting gas to China and Europe. Eventually, gas prices will stabilize at a somewhat higher level and I expect that the utility companies will return to using coal power plants for the base load and using natural gas to adjust to the peaks.

Meanwhile, BNSF and others will seek to export more coal to offset reductions in domestic demand. I think they will be only partially successful as China, Russia and others begin to exploit their own shale gas resources.

Regarding the Panama Canal improvements, I have a legal question. It would make sense for a post-Panamax container ship to pick up cargo from several Asian Pacific ports and drop off at several US Atlantic ports. For example, a single ship could stop in Jacksonville, Norfolk and New Jersey to unload. If a majority of the cargo was unloaded in Jacksonville and Norfolk, the height of the Bayonne Bridge wouldn't be an impediment. But can a foreign flagged carrier with a foreign crew stop at consecutive US ports?

I've been long on CSX for 30 years before the mergers with Chessie System.

I read the article the other day. When I worked for CSX now retired rumors were constant on a east-west merger. The talk was of CSX-UP & BNSF-NS. I didn't think that was going to happen. These railroads have agreements in place with each other coast to coast. CSX is actively working on lessoning it's dependance on coal the breakdown 10% domestic 20% export. Predictions for export coal it will increase every year. CSX is spending on upgrades for intermodule business gearing up for 3Q 2014 when the Panama Canal expansion is complete. They've opened up a new yard at N.Baltimore, Ohio & revamping Columbus. At a CSX Retirees Luncheon CEO MIke Ward stated N.Baltimore will allow CSX to bypass Chicago which makes sense. If anyone has ever ran into Chicago they understand. CSX is spending billions on upgrades. That doesn't sound like a merger in the making. Just my opinion the article threw me for a loop when I read it. It sort of came out of nowhere. The last merger/acquisition when CSX & NS went to war over Conrail it nearly sent both railroads into bankruptcy.

Great point; with the exception of the coasts, we tend to think of rail as East - West. I've heard this about CP for a while. It's a great idea.

Jeff Smith wrote:Great point; with the exception of the coasts, we tend to think of rail as East - West. I've heard this about CP for a while. It's a great idea.

It's interesting for sure, and I've heard speculation about it too, but I worry about trying to funnel all the potential north-south traffic through the ex-ICE lines. CP would have to invest a fair amount of money from Kansas City through Savanna to La Crosse and Chicago. Although, I suppose it's no worse than the condition that the WC and EJE were in, upon their purchase by the CN.

EDIT: I have no direct position in any railroad company, though I may be unaware of them as rotating parts of my managed retirement portfolio.

Jeff Smith wrote:Great point; with the exception of the coasts, we tend to think of rail as East - West. I've heard this about CP for a while. It's a great idea.

The yard in N.Baltimore will also handle business coming in from Canada through Detroit ect...I tried to find the article a few months ago that CSX has an agreement with the CP. We do tend to only think of east-west forgetting the north-south connection. CSX also runs into Canada out of Buffalo, NY.

Here's an interesting article on UP: Has Union Pacific Become the Perfect Stock?

Since we looked at Union Pacific last year, the company has lost a point. But much of the reason for the score drop is the big gain in the stock, with a 40% jump in share price in the past year helping to push the dividend yield down below the key 2% level.

For years, railroad stocks performed uniformly well. With high energy prices, more efficient rail transportation led to lower costs, spurring new demand. As the largest hauler of freight in the industry, Union Pacific has particularly benefited from the trend.

More recently, though, the changing macroeconomic environment has led to a split among railroad companies. On one hand, Union Pacific's emphasis on the western half of the U.S. market has given it continued success, along with Canadian railroads Canadian Pacific (NYS: CP) and Canadian National (NYS: CNI) , as continued development of Canada's natural resources has led to a transportation boom there. But in the eastern U.S., CSX (NYS: CSX) and Norfolk Southern (NYS: NSC) have struggled as the dramatic reduction in coal prices has led to reduced shipments in the Appalachian region.

One way Union Pacific has fought the railroad industry downturn is by finding new things to deliver. For instance, the railroad has boosted its shipments of lumber and homebuilding products lately, boding well for the housing market. Yet Union Pacific is also trying to represent itself more as a logistics solutions business, with an ad campaign to match.

And here's an interesting one on Canadian Railroads:

Why Are Billionaires Buying Canadian Railroads?

Bacon and his team seem to be investing in Ackman's attempt to turn around Canadian Pacific. At the moment the company is not at a particularly good value; it trades at 22 times trailing earnings, and saw its net income fall last quarter compared to the same period a year ago. Wall Street analysts expect a rebound, and therefore the stock trades at only 15 times their expectations for 2013. This past May Ackman took over the company's board, and the fact that the company's decreased earnings last quarter still beat expectations has helped drive it up 22% this year.

D.E. Shaw's pick, Canadian National, looks very interesting to us on its investment merits. Despite double-digit percentage increases in revenue and earnings in its most recent quarter compared to last year, analyst estimates have a forward price-to-earnings ratio of 15, unchanged from the trailing P/E. In other words, it is a value stock that has been seeing good growth recently.