I've Been Workin On The Rail Roads

One of our readers asked about rails and a speculative play in the market. Here was their note:

"I have been checking on rail companies for the account.  I found one RA or CSX (dividend) what do you think?  Also, Zynga speculative."

Here is my reply:

Let's look at the rails.  That is a sector we do homework on from time to time.  In December we did a lot of homework and here is what we found out .  The best source of information is AAR Association of American Railroads.  (It covers statistics in the US and Canada and more and more some Mexico stats.).  We learned that from Cramer as he uses box car (carloads) counts to measure thee health of the industry.  October was a good month for the industry, the best since 2008.  Traffic during the fourth quarter was the highest in 4 years.  The strongest sectors were ore and autos.  Keep in mind there are a lot of emerging markets learning to grow their own crop and that will hurt the usually strong agriculture rails sector.  The good news is we are shipping a lot of Potash to those emerging market and that plays well for the rail sector.  Norfolk Sothern and CN had good fourth quarter results.  One of the things you have to keep an eye in this sector is Labor.  Rail strikes can cripple a rail company and its stock. 

More good news there as the

and Trainmen and the other big three union all signed a contract in November which provides labor stability in the market for a while. 

One area of questionable growth is the short haul or intermodal rail sector.  The rail companies are trying to take business away from truckers and are building rail depots along key highways.  The verdict is out whether this will be successful.  If we see diesel increase a few percent, rails look cheap.  If we continue to see fuel below 4.00 a gallon the rail alternative is not so compelling.

At the end of the day the rail sector looks sexy as long as we continue to see a global economic expansion.  Now let's look at a few individual stocks.

You were looking at RA and CSX

Lets start with CSX.  CSX Corp. provides rail and intermodal transport services.  Has about 21,050 route miles in 23 states and two Canadian provinces. Connects the Northeast, Midwest, and Canada with the Southeast. Principal freight: coal, fertilizer, chemicals, automobiles & parts, agricultural products, and intermodal cargo. Integrated 42% of Conrail 6/1/99. Sold Sea-Land's international assets 12/99; contract logistics unit 9/00; CSX Lines 2/03; CSX World Terminal 2/05. 2010 rail operating ratio: 71.1%. Had 30,300 average employees Q1 2011. Capital Research owns 12.4% of common; FMR LLC 6.0%; offs. and dirs. 0.4% (3/11 proxy). Chairman and CEO: Michael J. Ward.

Craig Sirois, the analyst for Value Line Survey is most quoted by Bloomberg and Barron's as he is the rail nut analyst.  From him you can learn the metrics of the industry like on time departures/arrivals, terminal dwell time, and train velocity, to name a few.  He said that CSX was adding employees and equipment faster than volume would dictate at the end of last year, but that should bode well fo the increase in volume they are expecting and seeing this year.  Since they geared up for the increase they can maintain rates for superior service.  All sectors of shipping look good for the company in the next 12-18 months with the exception of Coal, which is important to the company.  The low price of Nat Gas has made it an alternative to coal and the fear of the European recession and new Australian coal discoveries could make this commodity a smaller part of their revenues this year.

Then you have RA RailAmerica, Inc. is a leading owner and operator of short-line and regional freight railroads in North America. Has a portfolio of 40 individual railroads with approximately 7,400 miles of track in 27 U.S. states and three Canadian provinces. Freight mix (measured by overall 2010 carloads): Coal, 21%; Agricultural Products, 15%; Chemicals, 11%; Non-Metallic Minerals & Products, 9%; Other, 44%. Has approximately 1555 employees of which 870 are non-unionized. Fortress Investment Group, through an affiliate (RR Acquisition Holdings), owns 56.3% of the outstanding shares; Officers & directors, 2.8% (4/11 Proxy). President & CEO: John Giles.

Craig Sirois does not cover RA so the information is a bit trickier to harvest.  Last year was a flat year for RA as far as key metrics.  The reasons according to Morningstar and Value Line were because of a key steel plant closure and a large customer's shift in ore sourcing to a source not serviced by RA.  RA does have some nice non-rail service income that make them attractive.  They also just bought Marquette Rail which is a nice play in the pulp paper and specialty chemical business.  Their exec gave very robust guidance for this year and to that end they just announced the purchase of Wellsboro and Corning RR which will give them a nice beach head in the Marcellus Shale site in Upstate New York.  All of this bodes well for the company assuming it can pay its debt.   

As far as a trade on either, we like RA better than CSX, but in looking at the CAN SLIM Model, a better candidate pops out and that would be GWR Genesee & Wyoming owns and operates 63 short line and regional freight railroads. Also performs contract coal loading and railcar switching for industrial customers. GWR has operations in the U.S. (68.9% of '10 revenue), Australia (21.5%), Canada (7.9%), and the Netherlands (1.7%). Also owns a minority stake in a Bolivian railroad. '10 freight revenue mix: Pulp & Paper, 14%; Coal, 19%; Minerals & Stone, 10%; Metals, 9%; Other, 48%. Has 2,647 employees. '10 operating ratio: 77.2%. Off. & dir. own 3.5% of class A and 67.5% of class B shares outstanding (representing 27.0% of total voting rights); Baron Capital, 9.6% of class A (4/11 proxy). Chrmn. & CEO: Mort Fuller III.

They have a great story to tell and we like the financials better.  So much so that tomorrow we are going to start a position in the stock.  There is a real clear cup and handle pattern defining a perfect 62.60 buy point.  I do not see a clear entry point for RA at the moment.  If we can get in below $63.75, that would be great.  We may have missed that boat as after hour trading is showing huge spike to 68 a share?  Someone leaked my blog?

Regarding ZNGA.  I love the company as I play poker on line and scrabble with all my smart phone friends via ZYNGA.  Rumor has it when Congress opens up on-line gambling (and they will as all great societies welcome gambling, prostitution, and bestiality right before their demise -Gibbons The History of the Decline and Fall of the Roman Empire) ZNGA will have the Lion's share of the market as they have 3 of the 4 most popular games on Facebook.  There are an estimated 40 million Zynga game users and I would not be surprised to see Facebook buy them at some point in time.  As you said, this would truly be speculative as they have no audited financials and their earning potential is impossible to determine.  USE THE VEGAS MONEY.  Heck, speaking of a gamble, I'll play a little with ya.  I'll take a position tomorrow at 13 a share if I can catch it.  It would one of the few times I bought something at 60 times earnings.

Hope that helps. 

Another Lite Day

Just like yesterday we had a lite day to the upside instead of the downside. We'd like to get the Greece issue behind us and figure out where this market is heading. We are optimistic about a nice run after a few down days (maybe 2-3%). Despite Bernanke's "dovish' comments (he is starting to sound more and more like Greenspan every month.) we think the economy is getting better by the month.

In the portfolio, GLD had a nice 7% pop today. AAPL and XOM helped make the number green. Other than that, there was a lot of sideways movement. We are watching CELG closely as we think one good volume day to the upside and this stock will break like a thoroughbred. If we can get day like the 9th of January, we could see a quick ride to 78 or 80.

Salve Lucrum