Mr. Toby Kolstad

GLG News by Mr. Toby Kolstad, President

Clean air may blow away more railroad coal traffic than clean air rules

October 28, 2008

Analysis of:CSX chief says coal is under attack | www.topix.net

CSX Chairman Michael Ward recently remarked on the growing opposition to coal fired utilities in the country, saying that limiting coal’s use for electricity "is probably one of the stupidest things you could do." For CSX and the other railroads, it would be a bad thing if the electric utilities turned their back on coal for new power.  His fears are not unfounded; in fact, they are a bit late; the utilities have already turned their back on coal, and the railroads have probably helped them do that as much as any fear of future environmental regulations.

Wabtec poised to help railroads and commuter lines with crash avoidance system

October 23, 2008

Analysis of:BNSF Ready to Implement Positive Train Control | www.marketwire.com

BNSF railroad recently announced that the company would install Positive Train Control (PTC) technology across its entire system by Dec. 31, 2015 and in the Los Angeles basin by 2012. BNSF had been given approval by the Federal Railroad Administration to install the Electronic Train Management System (ETMS) it jointly developed with WabTec (WAB) on a system-wide basis almost two years ago in January of 2007. However, it took the tragic accident involving a commuter train and a UP freight train in LA last month to get the railroad committed to a completion date for this system. Wabtec is working with Norfolk Southern and other freight railroads on similar systems, and will almost assuredly be working with commuter lines to install their failsafe train control system.

Railcar deliveries will fall again in 2009 by a significant amount

October 8, 2008

Analysis of:Rail equipment shares fall as KeyBanc lowers estimates and outlook for deliveries | biz.yahoo.com

The stock prices of all railcar builders declined after a recent prediction by a KeyBank analyst that railcar deliveries will fall in 2009. He estimated that deliveries in 2009 would fall to around 37,000 cars from the 45,000 to 50,000 cars expected this year. It is hard to argue with this forecast except that it might be a little too optimistic if there is a severe economic contraction in 2009. However, several more weeks will be needed before such a dreary scenario can be painted.

Freight rate increases have been only story for NS profits in 2008

October 7, 2008

Analysis of:US freight lines carrying a lighter burden | us.ft.com

In every story about railroad traffic and railroad profits in this, and indeed in all of the last few years, commentators have used revenue growth as a surrogate for traffic increases, neglecting to inform the reader that traffic levels have been uncharacteristically stagnant in the recent  economic upturn and that most revenue increases have been due to freight rate increases. In 2008, carloads and tonnage in many domestic traffic segments have actually decreased and only export traffic has kept the overall freight volume from declining.

Wabtec (WAB) continues to grow

September 19, 2008

Analysis of:Wabtec to acquire Chicago rail supplier for $300M | pittsburgh.bizjournals.com

Standard Car Truck will be a great addition to the Wabtec family of companies. There is no overlap in product lines and most of the products offered by Standard will compliment those already made at Wabtec. Moreover, there are potential synergies that may enable the company to grow organically after the initial synthetic growth to their corporate operations is achieved. Wabtec has steadily grown both through increases in market share and through acquisitions over the past several years and this recent purchase appears to be a continuation of a well planned strategy.

It’s not just falling fuel prices that are driving railroad profits

September 16, 2008

Analysis of:Analyst sees short-term leap for 2 biggest rails | biz.yahoo.com

On September 10, an analyst at USB thought that the two major western railroads would do well in the second half of 2008, the day before CSX upgraded its earnings estimates for its third quarter from around $3.55 to $3.70.  USB had also upgraded Norfolk Southern to a BUY on September 10. Most analysts think falling fuel prices will give the railroads a short term boost in earnings due to the time lag between when fuel is purchased and when the fuel surcharges are recalculated. Since railroads hedge their fuel purchases, this may or may not be the reason profits at all four railroads will rise and continue to rise in the near future.

Railcar leasing gets a thumbs up from CIT

September 10, 2008

Analysis of:UPDATE 1-CIT says will retain railcar leasing unit | www.reuters.com

CIT Group Inc. (CIT) had placed its railcar leasing business on the market and invited several bidders to make an offer for its assets before changing its mind and deciding to hold onto the business. They were not alone in considering a sale of their railcar leasing business, although they were perhaps more public about their intentions than GE, the other major seller in recent months. GATX (GTM) and a few other big money players have actively pursued each company, perhaps seeing a brighter future for the railcar leasing industry than the sellers. So did CIT change its mind or did they really want to sell in the first place?

Aside from Wabtec and one or two other supply companies, real growth in railroad industry is hard to find.

September 3, 2008

Analysis of:You Need This Growth Stock | www.stockpickr.com

The current renaissance for the railroad industry began in 2004 when railroad traffic exploded (double digit gains in some key traffic segments) and freight rates were unlocked and allowed to seek a market level. For the railroad companies, the exceptional profit gains since 2005 have been almost exclusively due to continued rate increases, since traffic levels today are barely above those recorded in 2006. For most other companies in this industry, suppliers and financial companies, results have been mixed, with more seeing problems than enjoying the fortunes of the railroad companies. Wabtec is one of the few exceptions, and since its profits have not come from higher prices, it prospects for the future outshine even the railroads.

Many companies besides the major railroads will benefit from resurgence of railroad industry

August 25, 2008

Analysis of:Following Buffett's Railroad Tracks | seekingalpha.com

The Class I railroads have boosted their earnings and share prices in recent years by increasing their freight rates much faster than their costs have risen, both fuel and labor. The high price/earnings multiples of their common shares (ranging between 17 and 21) attest to many investors’ belief that the rate increases and the resulting earnings growth will continue for some time. For more cautions investors, however, there may be ways to invest in this industry without having to worry about peaking stock prices. Wabtec (WAB) and Trinity Industries (TRN) are just a couple of the good companies that look to be well positioned for future growth.

Production of coal cars may not significantly increase in future

August 14, 2008

Analysis of:FreightCar America: Coal Car Orders Will Pick Up Soon | seekingalpha.com

There is much hope that orders for new coal cars will increase in the near future, lifting production rates at Freightcar America (RAIL). Coal exports are up almost 80% from a few years ago and domestic demand should increase significantly when the 52 new coal-fired generating plants which are currently under construction come online. The latter are expected to require about 20,000 railcars to move coal from the mines to the utilities. Coal production is up 1.1% in 2008 and railcar loads are up 3.1% through July. So why are orders for new cars so low?

Freightcar America (RAIL) succumbs to high material costs and low demand

August 6, 2008

Analysis of:FreightCar Skids On High Costs | www.forbes.com

Railcar builder Freightcar America reported a quarterly loss of $0.08/share due to high material costs impacting fixed price contracts and the need to restrain prices in a very slow market for coal cars. Management expressed confidence that demand for coal cars will remain strong in the future, especially if all the new coal fired utility plants that have been in various stages of planning and construction for the past several years come online in the near future. The EIA has questioned the need for all of the new coal fired power at this time, and with the recent declines in the price of natural gas, it is possible that some of the plants may never be built.

Trinity is recapturing market share in declining railcar market

August 4, 2008

Analysis of:Trinity Industries’ Q2 earnings grow 25% | dallas.bizjournals.com

Trinity Industries (TRN) reported earnings growth and increasing orders and deliveries in an otherwise declining market for new railcars, a feat that will probably elude the other railcar builders. Its 6,580 deliveries during the second quarter represented a 44% market share for the entire industry, and its orders for 7,430 cars accounted for 61% of the industry total. Moreover, Trinity said it expects its earnings in the third quarter to be close to those of the second. Is Trinity returning to its old strategy when it and its merger partner Thrall Car had an annual 61% market share?

Railroad Pricing Power continues to trump falling volumes

July 24, 2008

Analysis of:Norfolk Southern 2Q profit rises 15 percent | biz.yahoo.com

CSX and NS have both announced significant increases in quarterly profits while at the same time reporting declining traffic levels, a feat they have performed more than once in recent months. Overall railroad traffic was down about 2% for both carriers compared to last year, although up around 3.5% compared to the first quarter.  Both carries continued to raise their freight rates, with average revenue per car figures increasing from both the first quarter’s rates and from the rates in effect last year.  The commodity boom and the increasing cost of fuel oil have allowed the railroads to prosper in these worrisome economic times and an end to the combination of these forces does not appear to be in sight.

Floods are the least of the railroad worries in 2008

July 15, 2008

Analysis of:Railroads: The Calm After the Storm | investerms.com

The recent reports about the crop problems in Iowa and the flood problems for the railroads operating in the region have greatly exaggerated their impact on railroad profits in 2008. The news media might be excused for inflating reports of local problems into national importance in order to garner more readers, but UP executives are probably hiding behind the Midwest flood stories to keep from having to explain revenue and profit shortfalls due to other reasons and other regions.

Prince Rupert Traffic contributes to Intermodal Gains at CN

July 10, 2008

Analysis of:CN welcomes added vessel call at Port of Prince Rupert container terminal | biz.yahoo.com

A second container vessel will make weekly stops at CN’s container terminal in Prince Rupert BC potentially bringing 1000 more containers per week to CN for movement to the Midwest and possibly raising the terminal’s inbound volume to over 2,000 containers per week.  At that volume, more than one train per day will be needed to handle the traffic and the train movements will be more evenly distributed throughout the week, decreasing the equipment and crew costs per load. Thanks to the rising price of bunker fuel that is increasing the shipping costs for ocean carriers, CN’s investment in this line may break even faster than even they might have anticipated.

Railroad Pricing Power successfully challenged again, but not enough to end rate increases

July 2, 2008

Analysis of:Sector Snap: Rate ruling seen hurting railroads | biz.yahoo.com

On June 30, 2008, the STB ruled that CSX was charging excessively high rates to Dupont for several movements of chemical products and ordered the railroad to reduce them and pay reparations to Dupont . Several weeks ago, the STB ruled that UP had overcharged a Kansas Utility and ordered them to reduce their tariffs and to pay reparations. While it is possible that these cases might be the firsts of many shipper challenges to recent railroad freight rate increases,  neither case set effective limits for the railroad companies and it is doubtful that they will mean an end to the pricing power of the railroads.  

More than floods in the Midwest are to blame for railroad traffic losses

July 1, 2008

Analysis of:US rail shipments fall 5.7 percent amid floods | biz.yahoo.com

The Association of American Railroads (AAR) reported that the Midwest Floods “continued to negatively impact rail freight traffic” during last week, a statement easily verified by a quick check of the weekly carloads of the UP RR which showed at 10% drop in carload for the week ending June 21. However, the Eastern railroads which have very few if any lines in the area suffering from swollen rivers, namely CSX and NS, reported carload losses of 8% and 5% respectively. More importantly, a continuing trend in decreasing carloads began in early May and has brought the year over year traffic gains of 1.1% posted on May 3rd down to only 0.3% on June 21st.

Railroad auto business is not the only traffic segment facing serious cutbacks in coming months

June 23, 2008

Analysis of:Analyst says autos to drag on rails | biz.yahoo.com

The recent announcements of major cutbacks in US light vehicle production will definitely have a negative impact on both railroad traffic volumes and railroad profits. While this traffic only accounts for only 5% of all US carload shipments, its hefty margins contribute much more to the bottom line than other traffic segments. However, more serious problems relate to the potential decrease in grain traffic during the current grain year due to the weather and flooding problems in the Midwest. After the 1993 floods, grain traffic fell 30%, and this traffic segment accounts for 8% of US railcar loads.

Demand for coal cars will increase, but so will Freightcar America’s competition for orders

June 12, 2008

Analysis of:Coal Fuels FreightCar | www.forbes.com

Overlooking the author’s tendency for hyperbole and his greatly distorted timeline of history, his conclusion that demand for new coal cars will soon return is right on target. He is also right in highlighting the current danger to those builders who might be exposed to fixed price contracts and escalating steel and specialty parts costs. However, he overlooks one crucial new element in the market for coal cars that Freightcar America (FCA) did not face the last time demand surged for its products: competition. In 2004, the last time buyers changed course and began ordering cars, FCA enjoyed an almost 100% market share. This time however, they will have to contend with a resurgent Trinity Industries (TRN).

Leasing companies order and/or buy railcars, not railroad companies; and therein lays the problem

June 6, 2008

Analysis of:Where Have All The Railcars Gone? | www.forbes.com

The in Forbes article about the large number of surplus railcars, the author incorrectly blames the railroad companies for stocking up on ethanol cars until the “ethanol bubble burst” and they realized they had built too many cars. In truth, railcar leasing companies ordered the cars after hearing requests and projections by ethanol companies about the need for more equipment to handle future production from new capacity that was either planned or already under construction. That new capacity is still coming online, albeit at a pace much slower than originally expected, and there may be a few thousand “surplus” cars until production catches up with car supply in 2009.  The ethanol phenomenon has mitigated some of the other problems faced by the railcar industry that can be more correctly blamed on the railroads.

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