Ask The Experts: September 11, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: How has the general performance of the rail sector compared with Canadian Pacific Railway (CP) growth?
Canadian traffic was up for the last quarter, US volumes down, and Canadian Pacific’s (CP) PSR journeys are several life cycles ahead. But, in the scheme of things, given expectations of overall market (S&P 500) earnings being flat to down and against tough YOY comparisons, the consensus expectations of +6% EPS, aided by buybacks to be sure, seems pretty good (and will, as with CP, prove low by some 50%). Transportation analysts have been crying poor and cutting numbers all spring and summer, so far (FDX didn’t help) – but the rails, the only good performing transport sector, continue to outperform the broader markets (YTD S&P500 +19%, rails +~30-35% ex-GWR).

Q: What are the real reasons for short line sales by Class I’s, and what are the benefits of Class I’s going private?
CSX has sold two line segments with more to come; the success of that project might help persuade other major rails to look to do similar things....but short line sales by Class Ones aren’t – or shouldn’t be – about the dollars (which are trivial, in the grand scheme of things) but about value creation for the main, core rail network (feeding the beast).

As for the “trend” of going private, well, BNSF is already quasi-private (Berkshire Hathaway) and often alludes to the benefits of that status, only sometimes tongue-in-cheek (note Union Pacific’s (UNP) push back of late in a most interesting war of words developing). The rest of the railroads simply are too valuable – UNP’s market cap is $118B ($8B being the “Vena bonus”); and frankly, as we have seen up North, the public markets can still work for capital intensive transportation businesses.

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Alison Babcock