by Allen Hazen
(Disclaimer: I amnot an economist, or a close observer of the stock market. What follows is a layman's take.)
1) A couple of news stories linked have mentioned a firm of "activist investors" called Trian, which has recently managed to get one of its people a seat on GE's board of directors. I think Trian may have a general strategy of pushing companies to "divest" assets. A few years ago, when DuPont split itself up, spinning off some chemical divisions as a separate company called, i.i.r.c., Chemours, Trian's influence was behind the decision.
2) The freight locomotive business is, I suspect, "hypercyclical" (not sure if that is a standard term or one I made up): the difference between how it does in good economic times and in bad economic times is greater than average (so: it "hyper-responds" to business cycles). I take it that this is because the "use-by" date for an aging locomotive isn't sharply defined: at an age when, if railroad business was booming, railroad management would replace a unit, in poor times railroad management can reduce that year's expenditures by making it soldier on a bit longer.
3) For other reasons, the railroad industry as a whole is hypercyclical. Running (and maintaining) a railroad line carrying 50 million tons per year DOESN'T cost 25% more than running (& m.) one carrying 40 m.t./y., so a large proportion of the added revenue a railroad gets in a boom year is profit. So even if the difference (between the ups and downs of the business cycle) is only a few percent in revenue, it's a much larger percentage of profits.
4) "Hypercyclicality" (in moderation) doesn't frighten an investor interested in the long term (particularly one who also has a portfolio of less hypercyclical investments to keep the money coming in in bad times): Warren Buffet was willing to invest big-time in BNSF despite the ups and downs of the railroad industry. But I don't think people like Trian are particularly keen on taking the long term perspective.
1) A couple of news stories linked have mentioned a firm of "activist investors" called Trian, which has recently managed to get one of its people a seat on GE's board of directors. I think Trian may have a general strategy of pushing companies to "divest" assets. A few years ago, when DuPont split itself up, spinning off some chemical divisions as a separate company called, i.i.r.c., Chemours, Trian's influence was behind the decision.
2) The freight locomotive business is, I suspect, "hypercyclical" (not sure if that is a standard term or one I made up): the difference between how it does in good economic times and in bad economic times is greater than average (so: it "hyper-responds" to business cycles). I take it that this is because the "use-by" date for an aging locomotive isn't sharply defined: at an age when, if railroad business was booming, railroad management would replace a unit, in poor times railroad management can reduce that year's expenditures by making it soldier on a bit longer.
3) For other reasons, the railroad industry as a whole is hypercyclical. Running (and maintaining) a railroad line carrying 50 million tons per year DOESN'T cost 25% more than running (& m.) one carrying 40 m.t./y., so a large proportion of the added revenue a railroad gets in a boom year is profit. So even if the difference (between the ups and downs of the business cycle) is only a few percent in revenue, it's a much larger percentage of profits.
4) "Hypercyclicality" (in moderation) doesn't frighten an investor interested in the long term (particularly one who also has a portfolio of less hypercyclical investments to keep the money coming in in bad times): Warren Buffet was willing to invest big-time in BNSF despite the ups and downs of the railroad industry. But I don't think people like Trian are particularly keen on taking the long term perspective.