GLG News by Mr. Toby Kolstad, President
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
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Railcar builders may have to wait two years or more for their fortunes to improve
March 25, 2009
Is It Time To Jump On Railcar Companies? (TRN, GBX, RAIL, ARII) | community.investopedia.com
Finding good news for railcar builders and lessors is getting harder with each new crisis in the economy. Railroad traffic has declined to levels not seen in many years and surplus railcars are clogging sidings and branch lines and annoying local residents across the nation. Railcar builders are seeing little new demand for their products and are hoping that backlogged orders will not be cancelled by distressed buyers. It is true that much of the fleet is old and will have to be replaced, but the start of that process could be delayed another few years and could be spread out over more than a dozen years into the future. It will take time before the recovery begins, and the recovery of railcar builder will trail the recovery in the overall economy.
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Railroad volumes signal economic contraction has ceased
March 16, 2009
Rail Freight Traffic Down During First Week of March | www.aar.org
Railroad traffic volumes for both carloads and intermodal (container and trailer) shipments have stopped falling, at least in the aggregate if not for all individual commodities. Weekly reports from the American Association of Railroads (AAR) have been pretty consistent in recent weeks with carloads down 15% and intermodal shipments down 15%. The same comment could be made for rail traffic in Canada and Mexico, although at different levels. Since railroad traffic has been a concurrent indicator of economic activity in the US, the rail data implies that the economy has stopped contracting near the end of the first quarter and has stabilized at a lower rate of output than recorded for the same period in 2008.
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Coal and Rail are both four letter words
March 11, 2009
Companies rethink coal plants | www.usatoday.com
Many companies are scaling back plans to build coal fired electric generating plants, and more states are halting approvals of new coal fired plants already on the drawing boards. During January the EIA cut its forecasted increase in coal fired generating plants in half, and that was before many of the current cutbacks were announced. The Obama Administration and its allies in the Green Movement have stated in unambiguous terms their opposition to any new coal generated electricity. What this means is that there will be no increase in national coal production in coming years, and perhaps even a decrease from the current depressed levels. Since coal accounts for about 30% of all railroad carloads, this does not look good for overall railroad traffic.
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Wabtec forecasts for 2009 freight car and locomotive business appear too rosy
March 4, 2009
Wabtec profit rises 9 percent in 4th-quarter on transportation strength, co. backs outlook | finance.yahoo.com
In their news conference to present the fourth quarter results and to explain their 2009 earning guidance, Wabtec executives gave some of the assumptions they used in arriving at their forecasts. They noted that new freight car production was expected to fall from the 60,000 units produced in 2008 to around 30,000 railcars in 2009 and that new locomotive deliveries were expected to fall 25%. It was noted that half of their freight car business was in the aftermarket (repair) segment that it related to fright car use and that they expected ton-miles to decrease only 5% in 2009. While these projections made sense in January, they now appear too optimistic.
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Will the railroads be able to repeat their 4Q08 performance during 2009?
February 23, 2009
US rail companies steam through the downturn in profit | www.ft.com
Although railroads saw their traffic volumes decline significantly in the fourth quarter, they managed to keep their revenues from falling as fast by flexing their pricing power during the early part of the year and raising rates in the face of weak or falling demand. The situation in 2009 looks to be very different; traffic volumes are falling much faster and much farther than they did during the last quarter of 2008, and increasing freight rates will not be able to compensate for that much lost revenue. For the first 6 weeks of the year, carload traffic is down 16.1% and intermodal traffic is down 13.2%, and railroad executives are forecasting only single digit increases in freight rates.
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Greenbrier faces loss of major order for 2009
February 12, 2009
Greenbrier Announces Work Force Reductions and Other Cost-Cutting Measures; Company Expects $16 Million in Annualized Savings | finance.yahoo.com
At the very end of their plant closure and payroll reduction announcements, Greenbrier (GBX) hinted that its contract with GE for 1,000 tank cars in 2009 and 10,000 tank cars to be delivered between 2010 and 2018 is being renegotiated. The 2009 deliveries covered by this contract account for over 50% of the total projected North American deliveries for this company, and any significant reduction could have major consequences. Since Greenbrier does not own either of its two manufacturing operations in Mexico, its realignment options are constrained by operating contracts at both facilities. Given its bleak outlook for the next few years, the moves made in 2009 may become permanent in 2010.
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Railroads plan to build through the downturn
February 9, 2009
AAR: Traffic down, investment strong | www.railwayage.com
Railcar loadings were down 17% during January and intermodal traffic decreased 16% compared to the first month of 2008. Railroad executives however are counting on increasing freight rates and rising traffic in the second half of the year to keep revenues stable enough to fund capex programs comparable to 2008. It will be a neat trick if they can do it, but don’t bet the ranch on the spending. Railroad revenues should fall in 2009, and capex funding has always tracked revenues for this industry.
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Trinity will do better than most car builders in 2009
February 4, 2009
Trinity's Q1 EPS view disappoints, idles plants | www.reuters.com
Trinity reduced its first quarter guidance for earnings per share to only 60% of what analyst had expected. The surprise was not the reduction, but that the analysts had not anticipated it. Railcar deliveries were forecasted in December to fall from around 60,000 cars in 2008 to near 30,000 cars in 2009. Moreover, wind power plant installations were also expected to fall from the 9 gigawatts of new power that came online in 2008 to something less in 2009, due both to funding problems and to the current economic contraction. Why these forecasts were ignored is the real mystery, not the expected delay in the company’s guidance releases.
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Wabtec will try to hold its ground in soft market without price increases
January 28, 2009
Wabtec sees '09 revenue flat to slightly down | www.reuters.com
The railroad industry and its suppliers will be in for a rough ride in 2009. Railroad traffic is forecasted to fall back to a level not seen since the last recession in 2002 and many suppliers are looking for a 50% reduction in deliveries this year. Railroad executives are promising that they will raise their freight rates and cut costs enough to offset the revenue shortfalls from lost traffic, but their record on cost reduction is not encouraging and there are political forces gathering to stop any large rate increases. Railcar builders are bracing for a tough year, and locomotive manufacturers are also expecting hard slogging. Of all the companies in this industry, Wabtec has the best chance of not sliding backwards. So how will Wabtec hold its own in this rough environment?
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CSX is thinking wishfully on rising freight rates offsetting falling traffic
January 23, 2009
CSX sees higher prices offsetting lower shipments | finance.yahoo.com
CSX reported fourth quarter earnings of $0.22 per share compared to $0.15 in 2007. More importantly, they managed to lower their operating ratio to 74.7%, the lowest quarterly performance in recent years and more than 2% lower than the 76.9% achieved during the fourth quarter of 2007. Freight volumes fell, but rate increases continued to offset the lost revenue. Management says that with 80% of the freight contracts for 2009 already in place, they can see a 5 to 6% revenue per car increases offsetting expected losses in freight volumes. With volumes expected to fall in the first quarter and perhaps first half of 2009 in the double digit range, this will be a neat trick. Obviously CSX thinks freight volumes in the second half will recover enough to offset first half losses.
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Greenbrier faces continued losses as demand for its main products looks dormant through 2010
January 12, 2009
Greenbrier swings to fiscal 1Q loss | finance.yahoo.com
Greenbrier reported a quarterly loss of $3.3 million, with deliveries amounting to only 800 units in its first quarter which ended in November, compared to 1,800 deliveries in the previous quarter, and the delivery total in this quarter may be the high water mark for their fiscal year which ends next August. During the last recession, Greenbrier’s share of the railcar market rose to 35% when its main car types, boxcars, all types of flatcars, and intermodal cars were in demand and the car types produced by the other builders were out of favor. This time around, the tables have been turned and any real demand for Greenbrier’s car types is not even on the horizon; its market share may plunge to under 10%. Moreover, Greenbrier’s efforts to enter the tank car market will be more difficult due to the problems in the ethanol industry and reductions in general tank car demand.
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Railroads can’t have their cake and eat it too!
January 5, 2009
Rail Shippers Ask Congress to Regulate Freight Prices | online.wsj.com
A public relations battle is brewing between railroad shippers who want public sympathy and congressional help against railroad freight rate increases, and the railroad companies who want a share of the economic stimulus money to be doled out by Congress 2009. It has been interesting to listen to railroad executives plead for public money one day to help them modernize and expand their rail networks, and then the next day to hear them boast of their financial gains and increasing future profits. In today’ tight economy, they may not be able to have it both ways.
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GATX keeps investing in railcars and its future
December 19, 2008
GATX buys railcars from Allco Finance Group | biz.yahoo.com
GATX reported that it recently purchased 3,650 freight cars from an Australian finance company, increasing its leased fleet by about 3%. The cars had an average age of only 2 years and the purchase price indicated the average price per car was $59,452. It takes some fortitude and good intelligence to make long term capital investments in these times, but for a company that has been in the same business for over 100 years, these are both proven virtues.
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American Railcar (ARII) consolidating production in Marmaduke
December 16, 2008
Railcar maker: Work should stay until Christmas | biz.yahoo.com
With orders dwindling and backlogs falling, American Railcar decided to consolidate production at the Marmaduke Ark facilities in 2009 rather than continue production at two locations. The 2008 expansion of the Marmaduke made the consolidation possible, since the original plant at that location could only handle tank car production. The second plant that was opened in early 2008 when ARII was contemplating other markets, and it was built to handle all types of railcars.
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Berkshire Hathaway Bet on BNSF is a bet on coal and imports
December 12, 2008
Warren Buffett's Burlington Northern Stake Rises To Almost 20% After Options-Related Stock Buy | www.fool.com
For the past ten years, the BNSF railroad franchise was arguably not only the best in the west but the best in the country. From the ATSF, it had the quickest overland route from Los Angeles to Chicago, truck or rail, and enjoyed the highest rates and largest volume of traffic from the busiest container port in the country. From the BN, it had the lion’s share of the low sulfur coal mined in the Powder River Basin. However, the future for these two traffic segments does not look as strong as it did in the past, and the franchise may not be as valuable as it once was.
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Good news or bad? Railroad fuel costs are coming down
December 9, 2008
BNSF drops planned fuel surcharge change | biz.yahoo.com
Before the double digit increases in freight rates in 2008, fuel surcharges accounted for almost 25% of the railroad freight rates for many commodities. Today the percentage is probably much higher. As fuel costs rose after 2004, railroads protected themselves against losses by adding the fuel surcharge to their freight rates. Shippers argued that the surcharges, based on published facts and formulas, gave the railroads more revenue than was justified by the rising fuel prices. If so, then the freight rates will fall in the future faster than the fuel prices. We’ll just have to wait and see since at least one railroad, BNSF, will not change the old rate formula based on $1.25/gallon diesel fuel.
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Railroad traffic is falling like a rock; will railroad revenue soon follow?
November 25, 2008
Weekly US rail shipments tumble 9.1 percent | biz.yahoo.com
The AAR reported on Nov. 20th that the carload shipments for the previous week were 9.1% lower than the same period in 2007. This was the sixth straight week of decreasing carload totals, with traffic volumes falling to levels not seen in many years for non-holiday periods. What makes these numbers even more disturbing is that weekly carloads of coal have been up over last year’s levels, and with coal traffic representing almost 30% of railroad shipments, the decline in volume of non-coal traffic was even greater than reported. In addition, coal production has been falling in recent weeks, as has the demand for electricity, and coal traffic may begin to decrease along with the other traffic segments in coming weeks.
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Railroad coal traffic will suffer as new coal plants are idled by new CO2 rules
November 17, 2008
Coal Power Plants May Have to Clean Up Their Act | www.usatoday.com
An EPA Appeals Board has reversed an earlier EPA ruling permitting the construction of a new coal fired power plant in Vernal Utah. The latter had been issued without regard for the additional CO2 emissions the plant would added to the environment. The ruling was hailed as a victory by the environmentalists and was directly related to a recent Supreme Court ruling that CO2 was a pollutant. President-elect Obama will be handed the means of essentially stopping all new coal fired plants from operating, since there is currently no cheap means of capturing and sequestering CO2 gasses. The “cap and trade” alternative to actually decreasing CO2 emissions will probably make these new coal plants too expensive to operate.
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Watch out for the red coming to the Greenbrier Companies
November 14, 2008
Greenbrier Stays In The Green | www.forbes.com
Greenbrier reported that their backlog for production in 2009 is less than half the number of cars they delivered in 2008 and that they may not make a profit on some of those cars due to higher than expected material costs. And that was the good news. The bad news is that much of their backlog is to be shared with a steel fabricating partner in Mexico who will build 1,000 tank cars for GE in the coming year. The remaining 1,900 cars are for their three other production facilities in Europe, Mexico, and Oregon, some of which might need more cars to make a profit.
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November 7, 2008
Rails Welcome Obama Presidency | www.aar.org
As lobbyists go, the American Association of Railroads (AAR) has to get the award for chutzpah in giving such a warm welcome to the new president. Like all bureaucrats and most elected officials, Mr. Obama seems to think of rail transportation primarily as a passenger service, although he has noted that the railroad have a roll in relieving the congested highways and providing a fuel efficient means of moving freight. Beyond that, there seems to be little knowledge of the business model of most rail carriers, especially where it involves the transportation of coal. On the latter topic, he is on record as opposing the continued use of coal to generate electricity and the need to find alternate sources of electric power. The stock market seems to have recognized this paradox, allowing railroad stocks to plunge 15% since the election.
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