The recent deal by Canadian Pacific Railroad to acquire Kansas City Southern is reigniting railroad stocks in a way not seen since Warren Buffett’s Berkshire Hathaway purchased Burlington Northern Sante Fe. But as Spencer Jakab writes in The Wall Street Journal, even without a deal there are reasons to like railroads:
A successful deal could bode well for other players if it unlocks further consolidation. Analyst Bascome Majors of Susquehanna Financial Group notes that more deals could follow after 2022 if the official attitude toward consolidation has improved.
But even if the deal is blocked by the Surface Transportation Board, there are reasons to like railroads. A big one is the spread of precision-scheduled railroading—a management concept that has increased efficiency and train speeds but annoyed some smaller customers. Kansas City Southern’s operating ratio, a measure of efficiency, improved to 60.7% last year from 72.8% a decade earlier. And, as concerns mount over global warming, trains are well-placed to take advantage given their far greater fuel efficiency per ton mile than trucks for intercity freight. Railroads are also an excellent hedge against rising energy prices, truck-driver shortages or worsening highway congestion. More expensive diesel often leads to an uptick in rail traffic.
Railroads aren’t the bargain they were when Berkshire Hathaway pounced, fetching 24 times forward earnings on average, according to FactSet, compared with 15 times back then, but it is hard to see them becoming less important in coming decades. What Mr. Buffett said 12 years ago when he announced his rail deal remains true of the sector generally: “It’s an all-in wager on the economic future of the United States.”
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