Sector Challenges – Railroads

Over the course of past few months, I have been featuring the Sector Overview series, where I take a sector (or an industry) and provide some basic/background information about the sector. In addition, I present the major companies in the field and profile at a high level comparing the peers. These articles are supposed to be what the title claims – an overview. It is up to each investor to compare and contrast individual companies and decide which one to pick if needed. These articles have garnered a lot of attention from readers¬†(Thank you once again ūüôā ) and the feedback really helps me¬†in making this a better blog for more quality articles. Lately, I have been thinking on the other side of these investment opportunities and decided to¬†highlight¬†the sectors to present the threats and challenges in current environment. I begin this series with a Sector Overview Challenges – Railroads.

The article Sector Overview – Railroads is available here. In that article,¬†I¬†explored the idea of investing in the railroad sector and presented the major railroad operators in N.America – which includes Union Pacific Corp (UNP), Canadian National Railway Co (CNI/CNR.TO), CSX Corp (CSX), Canadian Pacific Railway Ltd (CP), Norfolk Southern Corp (NSC), and Kansas City Southern Inc (KSU). In addition, there is Burlington Santa Fe (BNSF), but the company was bought by Warren Buffet’s Berkshire Hathaway and taken private.

Caveat: Before I get into the details of the challenges faced by the sector, I would like to highlight that this is by no means a recommendation to short the stocks. Remember each investment carries risk, and all I am trying to do with this article is to try and highlight the existing risks in current market conditions and during this part of the economic cycle. These conditions may disappear in due time as the economy goes through its ups and downs.

Continue reading

Canadian Pacific Dividend Stock Analysis 2015

Canadian Pacific Railway Ltd. (CP) is the smaller of the two Canadian railroad companies operating approximately 13,700 miles of network, serving business centers from west coast to east coast Canada and the United States Northeast and Midwest regions. The company has come a long way and has turned to become one of the most efficient and profitable companies in the sector. In a matter of three years, the operating margins have doubled. However, dividend growth investors have found it disappointing as the company has not raised dividends since 2012. With a low starting yield of 0.75% and low payout ratio of 15%, there is plenty of room for those dividends to grow, but the company Рthanks to its largest shareholder Pershing Square Capital has gone the route of share buybacks to return cash to shareholders. That trend is expected to continue as the company intends to raise more cash from the debt markets to issue further buybacks.

Continue Reading Here >>

Sector Overview – Railroads

Fewer investments garner as much as attention to the pulse of the economy as the railroad sector. The railroads are considered a leading indicator for the overall health of the economy as transportation of goods is critical and gives investors a sense of how companies and consumers are spending their money. If we observe legendary investors such as Warren Buffett and Bill Gates – it is clear that they are fans of the railroad companies and believe in the long term prospects with Buffett’s Berkshire Hathaway buying out Burlington Santa Fe (BNSF), taking it private and Gates’ Cascade Investments holding a sizeable position in Canadian National Railway.¬†Railroads are what we call a wide-moat¬†industry sector – where it is extremely hard for new entrants to get established and challenge¬†the incumbents. This makes the railroads very attractive for long term investors.

Whether transporting crude, lumber, merchandise, agricultural or industrial products, railroads are what keeps the economy moving. While the transportation for entities such as coal (which used to be the largest users of railroad services a few years ago) has fallen due to the fall in crude prices and rise of green energy alternatives, the transportation need for crude saw significant rise in the recent past. However, the recent turn of events with falling energy prices, has put a damper on crude transportation via railroads. The following chart from Association of American Railroads shows the trend in traffic for various payloads.

Continue reading