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A view of CN's Thornton yards in Surrey, B.C. (ANDY CLARK/REUTERS)
A view of CN's Thornton yards in Surrey, B.C. (ANDY CLARK/REUTERS)

NUMBER CRUNCHER

Railways and the recovery: Hop on board Add to ...

Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. michael@wickhaminvestments.com

What are we looking for?

Investing in railways may be a good way to play a North American recovery.

Most of them have been around for over a century, and they are in better shape than they have ever been.

More Related to this Story

The railways are slowly seeing their traditional clients, such as automobiles and lumber supplies, increase shipments as the economy improves.

Oil producers are also turning to trains to transport their supply to refineries clustered on the U.S. Gulf Coast.

Rail companies increase pricing every year by the rate of inflation plus 1 or 2 per cent, and trains are two to four times more fuel efficient than trucks.

Today’s screen takes a detailed look at the North American railway companies.

The screen

My colleague Rob Belanger and I listed these companies in terms of their operating ratios, from best to worst.

The financial performance of railways is often assessed by their operating ratio, or the railways’ expenses as a percentage of operating revenues.

It is a key performance metric in evaluating railways, and we are looking for a low number.

The industry runs at about 17 per cent return on equity, and good companies will be around that level.

Valuations expressed by the price-earnings ratio range from 10 times to 50 times.

Value investors may want to look at eastern U.S. operations such as Norfolk Southern Corp. and CSX Corp.

The debt-to-equity ratio is used as a standard in judging a company’s financial standing.

Investors usually prefer low debt to equity ratios because their interests are better protected in the event of a business decline.

All of these companies have very acceptable debt levels.

The revenue per car is key for judging the value added of each individual shipment, and the value of each shipment.

This metric allows for comparison between railway companies of differing sizes, which pure revenue does not.

It takes lots of dollars to maintain thousands of kilometres of track, so railways do not stack up all that well in terms of converting revenue to free cash flow, but a dollar spent on infrastructure has offered a better return than in other industries.

We are looking for a high free cash flow yield.

Conclusion

Railways are an essential part of our economic infrastructure, and although there are quirks and drawbacks to these companies, they can be very worthwhile investments.

 

Close-up on railways

Company Ticker Market cap ($ bil.) ROE (%)
Canadian Nat'l Railway CNR-T 37.45 23.2
Union Pacific UNP-N 57.21 20.3
Kansas City Southern KSU-N 8.51 13.4
CSX Corp. CSX-N 20.63 21.7
Norfolk Southern NSC-N 18.46 18.1
Canadian Pacific CP-T 15.72 13.2
Genesee & Wyoming GWR-N 3.3 6.1

All dollar figures U.S. Source: Bloomberg, Wickham Investment Counsel Inc.

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