Wheeling and Dealing
(continued)
Total revenue, a measure adopted from the
software industry, and revenue per carload also became important
in the '90s. Once
these measures were established,
analysts began to "drill down" and look at the volume and price relationships
in different categories of expenses. Fuel costs, for example, are examined by
gallons consumed, average price per gallon and gallons per carload. Labor is
analyzed by cost, head count and carloads per person to obtain an overall labor
ratio on a given property.
While operating ratios remain a factor in analyzing railroads' performance, they
have become less meaningful since the mergers of some of the Class 1s. The cost
structures at Norfolk Southern and CSX, for example, are significantly different
from those at Canadian National. While NS and CSX are burdened by the cost of
their Conrail acquisitions, CN took a significant write-down in the carrying
value of its assets as a condition of its privatization, Carlson said. "An
85% operating ratio on one railroad may not represent the same efficiency factor
on another railroad."
"When you analyze a railroad you are really analyzing the industry it serves," Carlson
said. The most significant factors in the railroad industry are: automobile sales,
housing starts (and the forest products they consume), coal, domestic steel production
and overall interest rates, which play a significant role in determining railroads'
return on investment. Unlike other industries, railroad investments are long
in planning, with an average return of about 27-1/2 years. "We blast railroad
management for being conservative in their capital decisions, but how may people
have a crystal ball that says this will be a good investment looking out over
30 years?" he said. Management at the former Santa Fe, for example, took
a lot of heat from the investment community when it decided to double track its
transcontinental mainline instead of paying dividends or buying back stock. "But
when you look at how much the intermodal business has grown over the last five
to 10 years, it's a good thing the railroad made those investments," Carlson
said.
Regional and shortline railroads are analyzed differently than the Class 1s.
With so much acquisition activity in the shortline segment, analysts tend to
look at "same store sales"—the sales growth on properties that
have been in the portfolio of railroads for more than one year—to see what
management is doing with the basic railroad. Overall, they're doing pretty well,
with some shortlines growing at 6% - 7% compounded annually, compared to the
Class 1s' 1% to 2% overall growth rate.
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