Who isn’t enthralled by the sound of a train whistle in the distance? Billionaire investors like Whitney Tilson, Bill Ackman, and Warren Bufffett are certainly enamored of the rails. And why not, when some of these have run up 60% over the last year. Not to mention the railroads offer the safety of yield while you ride along with them.
Who has the best train?
Can you imagine Buffett knocking back Coca-Colas with Tilson and Ackman as they hold forth in a club car on the various merits of their choo-choos? What would they say?
The big divide among them wouldn’t be the Continental Divide of eastern versus western rails but whether to go Canadian or American. Union Pacific Corporation (NYSE:UNP) has the advantage of covering the American West with no real competition except for Burlington Northern Santa Fe.
Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) owns Burlington Northern Santa Fe, one of his biggest purchases ever at $44 billion. While coal shipments have been decreasing, oil is the commodity trains are hauling going forward. Union Pacific and Burlington Northern both haul from the Bakken shale region.
Whitney Tilson has been buying Canadian Pacific on the hypothesis new CEO Hunter Harrison will turn around the company. Bill Ackman is also a big rail rider. Canadian Pacific Railway Limited (NYSE:CP) is the top position in the portfolio. It was mostly due to Ackman’s activism that Harrison took over the helm last summer.
Canadian Pacific Railway Limited (NYSE:CP) and its rival Canadian National Railway (NYSE:CNI) fiercely compete in a duopoly, shipping crude, grain, potash, autos, and coal. Canadian National trades at a 15.39 P/E and offers a 1.70% yield. It is up nearly 20% over the last year.
Canadian National Railway (NYSE:CNI) operates over 21,000 route miles of track moving far into the American South, Midwest, and Canada. This gives them access to three quarters of the population in North America including 80 warehouse and distribution facilities in North America. It ships 45 million tons of coal from Pacific to Atlantic to Gulf coasts each year.
It also has an important 10 day supply chain headstart on coal to China (or Asia) from its Prince Rupert location. Canadian National is positioned well in the Bakken and with crude in general with its three coast advantage. Other competitive advantages include best on-time performance and short lines connecting these long distance coast to coast shipments to final destinations. No individual commodity accounts for more than 19% of carloads.
I suspect if Buffett ruled out Burlington Northern from the debate he might be somewhat partial to Canadian National Railway (NYSE:CNI). Tilson and Ackman might argue fiercely that Canadian Pacific has more growth potential but it only operates over 14,400 miles of track and doesn’t connect to the Gulf Coast.
Both companies are also involved in shipping the necessary frac sand from Canada to the Bakken, Marcellus, and western Canada shale regions.
Canadian Pacific has been streamlining operations by changing from hump delivery to flat switching where possible and by eliminating 4,500 positions by 2016. This should help them attain the 4%-7% revenue CAGR they promise by 2016. They predicted on their 2012 Investor Day presentation crude carloads are expected to grow threefold. Canadian Pacific Railway Limited (NYSE:CP) averages 54,422 weekly carloads of all goods.
Canadian Pacific trades at the highest P/E at 42.53 and offers the lowest yield at 1.1%. It is up 61% over the last year.
The all-American trains
Union Pacific Corporation (NYSE:UNP) reported Q1 2013 earnings and CEO John Koraleski mentioned the weakened grain and coal markets but the company still managed to improve EPS by 13% to $2.03 a share. Coal volumes alone were down by 19% but were offset by crude, industrial products, and automobiles to create a record Q1 operating revenue of $5.3 billion.
The company, based in Buffett’s hometown Omaha, and founded in 1862, links two thirds of the western US in 23 states with over 31,000 route miles. The company has bought back over 94 million shares since 2007 at an average share price of $80. As the stock hit a 52-week high of $146.04 on April 19 those were pretty savvy buys. Over 1,100 institutions agree, holding Union Pacific Corporation (NYSE:UNP) stock.
The stock trades at a 17.62 P/E with a 2.00% yield at a 30% payout ratio. Union Pacific is up 33% over the last year.
What about its eastern rival CSX Corporation (NYSE:CSX), more exposed to coal? CSX beat on both top and bottom lines. Analysts expected more of a decrease in revenues, which came in at $2.96 billion. EPS beat expectations by over 10% at an adjusted $0.45 per share.
CSX has a 13.26 P/E with a 2.3% yield at a 30% payout ratio. It has the same amount of route miles as Canadian National Railway (NYSE:CNI) at 21,000 and operates in 23 states east of the Mississippi.
Compared to these, CSX Corporation (NYSE:CSX) is the caboose, only up 10.28% over the last year. The declines in coal (volumes down 14% for domestic and 3% for export) and agriculture offset by chemicals and intermodal were again mentioned on CSX’s call.
Coming off this flat 2013 base however the company projects 10%-15% CAGR through 2015. This is close to analyst expectations of 10.99% growth. The company was optimistic about crude carloads increasing just as Canadian Pacific Railway Limited (NYSE:CP) was. Some analysts suggest that coal has bottomed and that CSX may be the beneficiary of more intermodal traffic and a slow upswing for coal.