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[h=2]Carload volumes continue to weigh on industry performance[/h] The AAR (American Association of Railroads) releases rail freight volume data on a weekly basis. To date, carload volumes have been on a downward trajectory, largely on account of softening volumes of energy-related commodities.
In particular, total carloads of coal have fallen by 9.4% YoY (year-over-year) to ~2.6 million. Coal as a commodity accounts for roughly 20% of the freight revenues earned by Class I railroad operators. These include Union Pacific (UNP), BNSF Railway (BRK-B), CSX (CSX), Canadian National Railway (CNI), Norfolk Southern (NSC), Canadian Pacific Railway (CP), and Kansas City Southern (KSU).
Enlarge Graph Coal is transported by these companies to fuel power plants. Nearly two-thirds of coal shipments are carried by rail. In recent years, however, the abundant supply of coal has put downward pressure on the commodity’s price. Also, competition from cheaper, less polluting natural gas has caused many utilities to substitute coal with natural gas.
[h=2]Intermodal volumes pick up[/h] An encouraging sign for railroads is the uptick in intermodal units. Intermodal freight refers to the long-distance transportation of shipping containers and truck trailers by rail, in combination with trucks. Trucks are used for the shorter hauls near the pick-up point, destination ends, or sometimes both.
Intermodal containers contain mostly consumer goods, ranging from auto parts and electronics to furniture and food products for retailer’s shelves.
Railroads have seen a big boost in intermodal traffic in recent years due to heightened international trade, continued investment in growing intermodal rail networks—$28 billion in fiscal 2014, and around the same projected for this year—and a shift from using trucks for intermodal transportation to using the railways.
Railroads have an edge over trucking companies because trains are highly fuel efficient. Railroads also have an expanding network and aren’t as exposed to certain risks, such as driver shortages.
As illustrated in the chart above, intermodal traffic has increased 2.7% year-to-date. AAR’s senior vice president of policy and economics, John T. Gray, asserts that “The growth in rail intermodal is one of America’s best transportation-related success stories. June 2015 was the highest-volume rail intermodal month in history for U.S. railroads, and 2015 will almost certainly set another annual record, breaking the record set last year.”
Union Pacific (UNP), CSX (CSX), Norfolk Southern (NSC), and Kansas City Southern (KSU) constitute ~25% of the iShares Transportation Average ETF (IYT).
Part 4
Assessing 1Q15 Hedge Fund Activity in Railroads (Part 4 of 4)
[h=2]Are Railroads Trading at Fair Valuations?[/h] By Santiago Solari • Jul 15, 2015 3:27 pm EDT
[h=2]Railroads trade at a slight discount to the market[/h] The railroad operator industry, as represented by Union Pacific (UNP), CSX (CSX), Canadian National Railway (CNI), Norfolk Southern (NSC), Canadian Pacific Railway (CP), and Kansas City Southern (KSU), trades at a slight discount to the S&P 500. The industry’s forward PE (price-to-earnings multiple) of 15.21x is at a slight discount to the S&P 500’s 17.5x.
As mentioned earlier in this series, railroads have underperformed the overall market and have yielded negative returns year-to-date. But the industry has outperformed the market over the last ten years on a total returns basis, with 17.56% annually. The S&P 500 SPDR ETF Trust (SPY) returned 7.7% in that time frame.
Enlarge Graph It’s worth noting that the S&P 500 also trades at a premium to its historical average of 15.54x, as asset prices in the US have benefitted to a great deal from a low-interest-rate environment.
[h=2]CNI, CP, and KSU trade at higher valuations[/h] Comparing the forward PEs (forecast earnings for the following year) of the aforementioned railroad stocks, CNI, CP, and KSU trade at slightly higher valuations than their peers. The forward EV/EBITDA (enterprise value to earning before interest, taxes, depreciation, and amortization) multiple, which removes the effect of leverage, indicates a similar trend.
While CNI, CP, and KSU have had strong margin profiles, their respective dividend yields of 1.6%, 0.7%, and 1.3% are average at best when compared to their Class I peers—NSC, UNP, and CSX—whose dividend yields range between 2.1% and 2.7%.
Investors looking to gain exposure to railroads can consider the SPDR Transportation ETF (XTN) and the iShares Transportation Average ETF (IYT). XTN is a modified equal-weighted index which includes over 48 transportation-sector stocks. It includes five Class I railroad operators:
In particular, total carloads of coal have fallen by 9.4% YoY (year-over-year) to ~2.6 million. Coal as a commodity accounts for roughly 20% of the freight revenues earned by Class I railroad operators. These include Union Pacific (UNP), BNSF Railway (BRK-B), CSX (CSX), Canadian National Railway (CNI), Norfolk Southern (NSC), Canadian Pacific Railway (CP), and Kansas City Southern (KSU).
Enlarge Graph Coal is transported by these companies to fuel power plants. Nearly two-thirds of coal shipments are carried by rail. In recent years, however, the abundant supply of coal has put downward pressure on the commodity’s price. Also, competition from cheaper, less polluting natural gas has caused many utilities to substitute coal with natural gas.[h=2]Intermodal volumes pick up[/h] An encouraging sign for railroads is the uptick in intermodal units. Intermodal freight refers to the long-distance transportation of shipping containers and truck trailers by rail, in combination with trucks. Trucks are used for the shorter hauls near the pick-up point, destination ends, or sometimes both.
Intermodal containers contain mostly consumer goods, ranging from auto parts and electronics to furniture and food products for retailer’s shelves.
Railroads have seen a big boost in intermodal traffic in recent years due to heightened international trade, continued investment in growing intermodal rail networks—$28 billion in fiscal 2014, and around the same projected for this year—and a shift from using trucks for intermodal transportation to using the railways.
Railroads have an edge over trucking companies because trains are highly fuel efficient. Railroads also have an expanding network and aren’t as exposed to certain risks, such as driver shortages.
As illustrated in the chart above, intermodal traffic has increased 2.7% year-to-date. AAR’s senior vice president of policy and economics, John T. Gray, asserts that “The growth in rail intermodal is one of America’s best transportation-related success stories. June 2015 was the highest-volume rail intermodal month in history for U.S. railroads, and 2015 will almost certainly set another annual record, breaking the record set last year.”
Union Pacific (UNP), CSX (CSX), Norfolk Southern (NSC), and Kansas City Southern (KSU) constitute ~25% of the iShares Transportation Average ETF (IYT).
[FONT="]1m3m6mYTD1y3y5y10y
Click Ticker Above to Show/Hide on Graph
IYT
UNP
CSX
KSU
BRK-BJun 29thJul 13rd…$142.5$145$147.5$150$152.5$155
[/FONT]
Click Ticker Above to Show/Hide on Graph
IYT
UNP
CSX
KSU
BRK-BJun 29thJul 13rd…$142.5$145$147.5$150$152.5$155
[/FONT]
Part 4
Assessing 1Q15 Hedge Fund Activity in Railroads (Part 4 of 4)
[h=2]Are Railroads Trading at Fair Valuations?[/h] By Santiago Solari • Jul 15, 2015 3:27 pm EDT
[h=2]Railroads trade at a slight discount to the market[/h] The railroad operator industry, as represented by Union Pacific (UNP), CSX (CSX), Canadian National Railway (CNI), Norfolk Southern (NSC), Canadian Pacific Railway (CP), and Kansas City Southern (KSU), trades at a slight discount to the S&P 500. The industry’s forward PE (price-to-earnings multiple) of 15.21x is at a slight discount to the S&P 500’s 17.5x.
As mentioned earlier in this series, railroads have underperformed the overall market and have yielded negative returns year-to-date. But the industry has outperformed the market over the last ten years on a total returns basis, with 17.56% annually. The S&P 500 SPDR ETF Trust (SPY) returned 7.7% in that time frame.
Enlarge Graph It’s worth noting that the S&P 500 also trades at a premium to its historical average of 15.54x, as asset prices in the US have benefitted to a great deal from a low-interest-rate environment.[h=2]CNI, CP, and KSU trade at higher valuations[/h] Comparing the forward PEs (forecast earnings for the following year) of the aforementioned railroad stocks, CNI, CP, and KSU trade at slightly higher valuations than their peers. The forward EV/EBITDA (enterprise value to earning before interest, taxes, depreciation, and amortization) multiple, which removes the effect of leverage, indicates a similar trend.
While CNI, CP, and KSU have had strong margin profiles, their respective dividend yields of 1.6%, 0.7%, and 1.3% are average at best when compared to their Class I peers—NSC, UNP, and CSX—whose dividend yields range between 2.1% and 2.7%.
Investors looking to gain exposure to railroads can consider the SPDR Transportation ETF (XTN) and the iShares Transportation Average ETF (IYT). XTN is a modified equal-weighted index which includes over 48 transportation-sector stocks. It includes five Class I railroad operators:
- Union Pacific (UNP)
- CSX (CSX)
- Norfolk Southern (NSC)
- Kansas City Southern (KSU)
- Genesee & Wyoming (GWR) – a short-line regional railroad firm