"An Interstate Rail System would provide several strategic advantages over the current system.
• Average freight train speeds would be doubled, from the current 20-25mph to 40-50 mph.
• The system would be able to handle substantial additional volumes of coal and grain without compromising the ability to handle general merchandise traffic.
• Reliable 6-8 day freight service would be available for essentially all carload freight moving within the lower 48 states and Canada.
• More industrial development opportunities would be available on lines that are well-maintained, safe, and served on a more frequent basis, whether by Class I or by short line railroads."
“I would ask the Committee to consider the following: The nation’s highway system has a Highway Trust Fund to support and maintain a safe and efficient federal highway system; the nation’s airports have an Aviation Trust Fund to support, maintain and enhance airport infrastructure and provide necessary capacity. If the existence of these two transportation trust funds are deemed to be in the public interest, why not a Railroad Trust Fund, or a similar user-funded mechanism?”
I think that is a reasonable quid pro quo 25% investment tax credit for “addressing concerns.”
However, the discussion of who the beneficiaries are (domestic vs foreign) is opening up a very large can of worms. We are already sending strong signals regarding investment in our country…the Chinese were not allowed to invest in oil ( I think Unical) and the ports on the east coast were addressed recently.
The US has always invested heavily in outside countries. This attempt by corporations to have it both ways (the ability to invest overseas while restricting investment or marketing of products here) sends very mixed signals and is extremely short sighted.
The reason the containers are streaming in from Asia is not the low rail prices, it is the inability of the United States corporations to produce at market prices. As long as labor rates overseas are what they are (India will probably be the next China) we will have this problem.
All good points, but one thing remains paramount - if it is the US taxpayers who are (indirectly) paying for the infrastructure investments, then said investments should favor domestic over foriegn interests, right?
Relative labor rates overseas are not the number one reason for the inability of US firms to compete in the US consumer market. Number one is the currency manipulation by the Chinese to keep the Chinese currency artificially low vs the US dollar. Number two is the environmental/regulatory/litigatory red tape that prevents US corporations from making the capital investments necessary to adjust to global changes in semi-real time. (It took the Chinese about 6 months from the development of the idea to actual begining of construction of the new Chinese rail lines. The DM&E saga has run over a decade now and they have yet to turn a spade of dirt for the new railroad grade.) Number three is the imbalance of import transportation rates
All good points, but one thing remains paramount - if it is the US taxpayers who are (indirectly) paying for the infrastructure investments, then said investments should favor domestic over foriegn interests, right?
Relative labor rates overseas are not the number one reason for the inability of US firms to compete in the US consumer market. Number one is the currency manipulation by the Chinese to keep the Chinese currency artificially low vs the US dollar. Number two is the environmental/regulatory/litigatory red tape that prevents US corporations from making the capital investments necessary to adjust to global changes in semi-real time. (It took the Chinese about 6 months from the development of the idea to actual begining of construction of the new Chinese rail lines. The DM&E saga has run over a decade now and they have yet to turn a spade of dirt for the new railroad grade.) Number three is the imbalance of
All good points, but one thing remains paramount - if it is the US taxpayers who are (indirectly) paying for the infrastructure investments, then said investments should favor domestic over foriegn interests, right?
Relative labor rates overseas are not the number one reason for the inability of US firms to compete in the US consumer market. Number one is the currency manipulation by the Chinese to keep the Chinese currency artificially low vs the US dollar. Number two is the environmental/regulatory/litigatory red tape that prevents US corporations from making the capital investments necessary to adjust to global changes in semi-real time. (It took the Chinese about 6 months from the development of the idea to actual begining of construction of the new Chinese rail lines. The DM&E saga has run over a decade now and they have yet to turn a spade of dirt for the new railroad grade.) Number thre
I didn’t make the assertion, FM did. My opinion is only based on anecdotal information, but I would place labor cost as the first factor.
I understand that China has its currency pegged to the US dollar. I think they produce the largest share of US imports (except for Canada and Mexico), but they are certainly not the only Far East source of consumer goods. If China’s currency was allowed to float, just what would be the change and how would it impact the balance of trade?
It is true that a manufacturing facility can be thrown up in China without meeting environmental or safety requirements, provided, of course, that the Chinese government approves. But how does that explain why companies close down perfectly good manufacturing facilities in the US and move production out of the country?
Maybe a comparison of the actual cost of shipping a consumer good to, let’s say, Denver from Chicago vs. Denver from any Chinese port city might be a reasonable illustration of the alleged inbalance of import vs domestic rates.
I think it would be very hard to invest in one and not the other. Most main lines that need upgrading have both domestic and foreign traffic on them, so how to do determine which lines get the help? Also, it would have been nice to see the railroads response to this, but as usual Dave only posts stuff to support his arguement. What’s the matter Dave, you were made to look like a fool on the Touble in Open Access Paradise thread, so you had to try to turn it around???
I would say that the improvements in the efficiency of global communication and transportation systems and the elimination of political and monetary barriers to free trade were needed to facilitate the shift. Further, in 1966, there was not all that much institutional knowledge on the subject of manufacturing in a foreign environment.
In 1966 it was much more difficult to take advantage of labor costs than it is today.
I don’t mean to suggest that there is no risks involved in the current situation. If China decides to let the Yuan float or political changes in the Far East result in a major disruption in manufacturing, I think we may find ourselves hanging out to dry.
I am NOT an expert on currency valuation. In fact, I know very little about it. So, a brief summary of floating currency rates, etc. would be much appreciated. I realize it is something I should be much more aware of, but my current career has very little impact on importing or export.
Dave, you list four valid points, I have no idea of how to rank each one.
Turning to something I do understand a little bit…I find it interesting that the railroads, particularly BNSF will continue to purchase it’s shares on the open market (share buyback) and not invest that $$$ into it’s own infrastructure.
Now, I realize that budgets are established and any free cash must be utilized in order to maximize ROE, but if a company buys back stock, yet borrows for capex, what is the point? Unless it is to mask the increasing number of stock options, which might be the case.
Bingo. Management, which ultimately negotiates these options agreements which are duly rubber stanped by the BODs, is making a killing off the stock-buyback programs. BNSF started its stock buyback about ten years ago – roughly the same number of shares outstanding now, ten years later, as then. That means the market has been flooded with executive option shares.
The same management advocates the stock buy-back programs to “boost” shareholder value. Sounds good to shareholders, even though it distorts normal market mechanisms because a very large buyer is not “rational,” that is, not buying according to realistic assessment of share value, or for “investement” purposes at all, but simply at “whatever” value.
The market is further distorted as large numbers of shares are “dumped” – ie options exercised – for reasons again unrelated to market value of the stock, but rather in relationship to the option price which is often tens of dollars different than market price.
Rather than a means to raise capital, the stock market increasingly resembles a compensation tool for management, rather at the expense of long term shareholders, and at the expense of a realistic measurement of the “real” market cap of the company. This contaminates the ability of railroads to raise important equity capital for infrastructure needs – compelling higher debt to equity ratios than railroads might otherwise enjoy – and which presents a greater risk during business cycle downt
Getting back to the original subject, another “quote of note:”
“Any program that provides sufficient funds…”
This is the same question that’s been floating in all these threads on this subject. It doesn’t matter if the government or a private company owns the rails, they still need a BIG investment to make his dreams come true.
Notice that this guy is living in a theoretical world. He can’t even tell you where the money will come from. In the real world, none of these investments in any type of infrastructure construction or improvements will get started until that question is answered. And there’s a LOT of other projects and special interests looking to get a piece of that same pot of money.
As to Michael’s point about Management and Stock Options, as long as they don’t manipulate timing, then it should not be an issue. Michael would you rather they paid them higher direct salaries? Or is it that you feel that management is overpaid, which is a different issue. Only a totally naive investor would not pay attention to stocks outstanding, and the buyback issue. The railroads are no different than many other large companies.
With reference to transportation costs, I had quote last year for a 40ft. container of furniture from
Ho Chi Minh City to St. Paul, MN, dock to dock, with cargo insurance, and customs brokerage fees
of $5600. This was for shipping in the last week of July last year.
Dont quite understand your comment regarding not borrowing for capex. A look at their cash flow statement indicates (2005) under Investing Activities:
Capital Expenditures - (1,750) …indicating they invested $1,750,000,000 (that is 1.750 billion)
Their “Purchase of BNSF common stock” was $799 million.
Common shares dropped from 376.8 million in 2004 to 371.6 million in 2005.
Stock options, restricted stock, et al are the 10,000 pound gorilla that got out of the cage. Not just in railroading, but all industries.
I currently own 20 common stocks and I read most of the proxies that I receive. The stock options and restricted stock provisions are upsetting to me. If you think BNSF is bad, try Pfizer. CEO of Pfizer gets nearly 1 million stock options per year. Plus the strike price is at the time of the offering. So, if the stock is at $25, that is the stock option strike price…and usually you have 10 years to execute the option. That is a license to steel shareholders $$$.
The day of the independent BOD is over. Take a look at the boards and you will see a carefully woven group of people that are inter connected from company to company. Most BOD will have a couple of “common” members that are on other boards.
Ah, I rant.
Shifting gears now. If I were a CEO and there was to be a 25% investment tax credit, but only with the condition of opening up my property to others…I would pass…really quickly. But, then again, I am not the CEO and dont have to make that decision.
Obviously they took a lot of the company out of the market a few years ago. At the same time they were aggressively expanding (Krebs…“if you build it they will come” philosophy which proved to be a pretty good investment). Long term debt peaked in 2000 and has dropped. There is an increase in other long term liabilities…no doubt leases on equipment.
I have mixed feelings about BNSF, i thnk they could be run better financially, but on the other hand, they sure have done a better job than UP.
Ed, IIRC our wonderful Federal Government played to populism a few years ago and limited the amount a corporation could deduct from its income taxes for CEO pay to $1,000,000.
I think good CEO talent is pretty rare (see Snow at CSX, Davidson at UP, etc. Who was that woman at Sara Lee? Problems, problems) A bad CEO will hurt a company faily quickly. So the good ones are in high demand.
Now a person who can manage Pfizer is obviously worth more than $1 million/year. So says the CEO market.
Pfizer gets around the asinine tax law (the govt. shouldn’t try to influence what Pfizer pays its management) by granting stock options.
I don’t think it’s a big deal. If he gets the stock up to $30 he’s done his job well and he’ll be rewarded with $5 million/year less his own taxes. I don’t think that’s outrageous pay for someone who can do that job.
People with rare talents and abilities get paid well. That’s a good thing. And I don’t see anyone being harmed by the stock options.
The best stock option deal I ever had was when I was a programer at MCI. (In the time before Bernie Ebers) The purchase price was set at the beginning of the year at 85% of the current market price. That’s the most we ever paid. If MCI stock went up our purchase price didn’t. If MCI stock went down, we paid only 85% of the market price. This was open to all MCI employees. We could buy the stock by payroll deduction.
Naturally, I maxed out my purchases. I left the company and sold all my MCI stock before that bad CEO, Bernie Ebers, crashed the company. He’s in the jailhouse now, or at least on his way there.
I don’t get upset by CEO pay. A good one is worth his/her weight in gold.
So is it your contention that the number of shares outstanding is different on the Income Statement than it is on the Balance Sheet.? They can’t be. You’re just blowing Montana Smoke again.
And year to year fluctuations in the shares outstanding don’t mean a thing… In 10 years BNSF reduced the number of shares outstanding from 468 milion to 381 million. You can falsely present that anyway you want, but they reduced the number of shares outstanding by 85,000,000 while investing heavily in expanding their capacity. What a great railroad!
I think what Michael is saying is that the difference is because of unexercised options. One statement is covering actual outstanding shares, while the other covers outstanding shares plus shares held by the company treasury to cover issued options, that have not yet been exercised.