America’s Class I freight railroads are turning in impressive financial numbers. They are for the most part out performing the nation’s S&P 500 companies. Here are a few indicators to make my point. I have shown the high and low for each category. The others fell in between.
The Trailing Twelve Month (TTM) average Return on Equity (ROE) for the Class 1 freight railroads was 18.46 per cent, which was 3.44 per cent higher than the average for the S&P 500. The Union Pacific had an ROE of 23.03 per cent, whilst the Kansas City Southern came in at 13.62 per cent. The standard deviation for ROE was 7.14.
The TTM average Return on Assets (ROA) for the Class 1s was 7.45 vs. 2.99 for the S&P 500. CN’s ROA was 9.77 per cent, whilst CSX’s ROA was 5.82 per cent. The standard deviation was 1.49.
The UP had the best TTM Total Return on Investment (TROI) at 10.67 per cent, whilst the CSX had a TROI of 6.44 per cent, with Norfolk Southern just beating it at 6.70 per cent. The average TROI for the Class 1s was 8.22 per cent and the standard deviation was 3.33 per cent. The average S&P TROI was 5.29 per cent.
In addition to these key financial ratios, the average revenue generated per employee, as well as the average net income generated per employee, hints at the productivity of the company’s workers.
To back up the point Sam 1 is making in this Thread :"… [snip]Translating average revenue per employee into average income per employee, i.e. how much each employee delivers to the bottom line, the average amount of revenue flowing through to average net income was 17.9 per cent. UP topped the list at 21 per cent, followed by Kansas City Southern at 18.6 per cent. The others ranged from 14.7 per cent to 17.2 per cent.
America’s Class 1 railroads continue to turn-in impressive financial numbers. As well as the ratios shown above, there are numerous other indicators that the railroads are meeting or exceeding investor’s expectations. Which raises an interesting question? Would merging the Class 1s into two or three mega systems really generate a better outcome? I think not.
These numbers are taken from widely published financials that can be found at Fidelity Investment, Yahoo Financials, Bloomberg, etc. I pulled them from Fidelity Investments website…" [snipped]
In another Thread in this Forum: “AOKX Covered Hoppers inTexas Normally Carry”
linked @ http://cs.trains.com/trn/f/111/t/215360.aspx
Is the following statement which seems to back up exactly what Sam 1 is saying: FTL ( quote: jeffhergert)[snipped] "…There’s a lot of frack sand moving from Wisconsin and Minnesota points to Texas right now. If the propaganda we have been told is true, the profit a certain railroad is making on each ca
Sam1, thanks for the interesting and impressive numbers in your post.
I have been looking at industry performance for the past 10 years from a variety of angles in order to understand how the recent superior financial results were achieved, and I believe the insights may be of some interest, and even a bit surprising. (My analysis used annual SEC 10-K reports for the four “Majors”: BNSF, CSX, NS, and UP.)
Pricing power emerged (or was finally recognized) around 2003, and has largely propelled strong financial growth. Volume growth has long been seen as the sine qua non for railroad profit growth (aka, leverage), but on a unit-count basis, the period 2003 through 2013 saw almost none, yet profits soared. Only BNSF and NS had positive unit-count growth (+1.6% and 0.7% CAGR respectively) over the 10 year period, with CSX declining at a -1.1% rate and UP at -0.2%. The combined growth rate for the 4 “Majors” was a mere +0.3% CAGR.
Further, the traditional view has held that volume growth combined with tight cost control was a combination sure to generate growing profits and returns on the measures you have cited. So, what about Operating Expense trends? Looking still on a unit-count basis, one might conclude that cost control wasn’t so tight: For the 10 years (2003 as base), the Majors’ Operating Expense per unit grew at +4.3% CAGR. (Realistically, though, one must recognize the very large im
When you say “unit-count” what units are you counting? Tons, ton miles, carloads, or something else?
Loads.
466lex:
I appreciate your analysis. It goes beyond the numbers I put up. I was looking at the current financial performance from an investor’s point of view. I own directly or indirectly shares in all seven Class 1s.
Knowing the macro effectiveness of each road, as you point out, would require an insider’s look at the books - operational and financial.
Revenues are a function of rate times volume. So too are expenses. As long as a company can grow the revenues faster than its expenses, i.e. marginal over marginal, it will generate more ROE.
Having spent 41 years with several Fortune 250 corporations, I am savvy enough to know that a bit of luck rides with every successful corporation.
At the end of the day, irrespective of how they have gotten to where they are, America’s Class 1 railroads are a class act. They are a prime example of the benefits of a competitive, market based system albeit one that is regulated properly, i.e. health, safety, level platforms, etc.
466lx:
Thanks for your detailed discussion. I appreciate the time and effort you put forth. There are several bits of financial data which I look at for railroads. First and foremost is the cash flow statement and how much free cash flow (cash flow - cap ex) is generated compared to the total revenue. A rule of thumb established by Pat Dorsey in his book “The Five Rules for Successful Stock Investing” is that a company that generates 5% of revenue to free cash flow - “is doing a solid job.”
CN (CNI) free cash flow/revenue is 14.9% compared to 19.3% for Johnson and Johnson17.1% for Coca Cola, 15.3% for McDonalds, 12.2% for Proctor and Gamble, and 10.4% for GE. CN is generating enormous amounts of free cash flow in an industry which demands a high level of capital.
Think about this…CN invests roughly 19% of their revenue (NOT PROFITS) into their business every year, basically to generate moderate growth.
I also like looking at units handled, in this case the number of carloads or intermodal units handled. The trend is your friend as is often said. What is happening with the number of carloads handled? Where is the growth? Where is the drag? Obviously coal is dragging and petroleum and intermodal are growing. Rails are fortunate to command huge revenues on oil movements these days. Part if this is due to the risk of handling, but another reason is (as 466lx pointed out) there is a new breed of managers. The pricing is not due to costs, but what the market will bear. There is no other way to move this oil (at this time). Therefore…pay up. On the other side, coal is seeing declining revenues per carload. CSX reduced average carload revenue by 9% on coal. Why? Coal is competing against other forms of energy, primarily natural gas. The CSX managers understand they must make concessions in order to keep the business.
Thanks to all for a meaty discussion. I will add an impressionistic note.
As one who suffered along with my favorite industry for the first several decades of my life, I am hugely gratified by its performance in the last couple of decades. As an investor, I got on board about 10 years ago and have been well rewarded.
At the same time:
A few days at a hotel beside I-35 in Texas last month showed me who is still king of everyday transportation. I’m a light sleeper, and out my window, in the middle of the night, there were never fewer than 3 tractor-trailers in sight at a given time. During the day, there would be at least 5 within the half-mile or so my view commanded.
The trailers were not the 20-foot containers we associate with last-mile delivery but the 53-foot dry boxes.
In short, for most Americans, it’s still true that, “If you’ve got it, a truck brought it.” In spite of trucking’s problems with hiring, infrastructure and tightened regulation. There’s still a world of opportunity and cash out there sailing past the oil, grain and coal drags and, yes, the stack trains too.
It could be the past and present will continue into the future, with plenty to go around for both modes. And it’s true the rails seem to have their hands full with their present allocation.
As a fan, I would simply enjoy seeing my favorite industry return to a place of more visibility and immediacy to the general public. And make a whole lot more money in the bargain – money that belonged to it in the first place.
I like the revenue per employee benchmark. It nicely encapulates why small business often has the edge. $500,000 per employee is good… but I (and many of my peers) operate at well over a $million per employee. Sometimes raw efficiency beats economies of scale, hence the large number of trucks you see on the road, many of which are run from a basement office of a modest home.