Propeller Skies

Another railroad performance measure I follow is average train speed. This measure, speed, is a pain in my fucking ass. Because financial disclosure regulations do not require it, railroads report speed whenever the fuck they feel like it or, in the case of Canadian National (CNI), almost never. However, reporting has improved recently and railroad performance measures are updated weekly except for CNI.

Despite the lack of reporting, average train speed is a very useful performance measure to track. Basically, faster trains allow railroads to haul more shit with less cars and fewer locomotives. Since freight cars and locomotives cost a fuckton of money, and hauling stuff is how railroads generate revenue, less capital equipment plus more stuff delivered equals higher profits.

The first conclusion that can be drawn from the above table is only half the major North American railroads provide average velocity on a regular basis. From the limited data available, all three railroads managed a year over year improvement in average train speed. However, only Canadian Pacific (CP) had an average speed above the five year average. CSX and Union Pacific (UNP) both had slower average train velocities in 2006 compared to their 2001 - 2005 average. Alert readers will recall that CSX and UNP also had the highest operating ratios during 2006.

Speaking of alert readers, if anyone out there on the internet could hook a cracka up with sources of historical speed data for the missing railroads, I would be most appreciative. Average dwell time would be nice, too.

Average train velocity is merely one performance measure. See the next post in this series: Free Cash Flow or previous posts in the series - Railroad Performance Measures: Yield and Railroad Performance Measures: Operating Ratio at the beginning.

notes:

Useful links regarding performance measures:

• Canadian Pacific AAR Reports
• Union Pacific AAR and STB Reports
• Railroad Performance Measures - does not include CNI.

Yield, or revenue per car is another railroad performance measure I calculate. Because the capital and operating costs of rail are similar no matter if they are filled with raw sewage or gold, railroads with a higher yield are in a better position to put mad cash in their shareholders’ pockets. Keep in mind, since I am measuring revenue per car and not profit per car, management can fuck up and lose money while hauling gold. Conversely, a well managed railroad can make a nice profit hauling raw sewage.

So, if management will probably find ways to waste money anyway, why look for a high yield? Railroads with high yields and improving profitability may be turnaround plays. To calculate the yield, simply divide total revenue by the number of cars hauled. Cars hauled can generally be found under: volumes, volume and revenue, revenue table, revenues, or similar table headings. Searching for carloads or cars hauled also works nicely. Because I am lazy, I do not bother to subtract out non-freight revenue when calculating the yield. While this may be technically incorrect, revenues from operations other than moving shit around are generally a small percentage of the total and are therefore insignificant.

Now, for fun, I will draw a few conclusions from the above table. First, all of the railroads are clearly enjoying pricing power. This is obvious because yield has increased year over year for each of the railroads and current yields are all above the five year average. Second, Norfolk Southern (NSC) is far below the average industry yield for 2005, 2006, and the 2001 - 2005 average. However, alert readers will recall from railroad operating ratios that NSC has a better than average operating ratio that has improved dramatically over the 2001 - 2005 average.

To show how yield and operating ratio work together to determine profit, I subtracted the Operating Ratio from 100 and multiplied by the Yield for both NSC and CSX, its closest rival. Using this measure of profitability, NSC makes $324 in profit per car, or roughly 21 percent less than CSX, which makes $412 per car. If NSC were to increase its yield to the same level as CSX, say by reducing the amount of raw sewage hauled and replacing it with gold, they would make $502 per car in profit, or 18 percent more than CSX.

Yield is simply one performance measure. See also Railroad Performance Measures: Average Train Speed, the next article in the series, or Railroad Performance Measures: Operating Ratio at the beginning of this series.

I like railroads as an investment for the following reasons:

• Simple to understand - railroads move heavy shit from point to point;
• Macro-economic effects on railroads are easy to figure out - when the economy is good, people are shipping stuff, when it crashes, volume goes down;
• Efficiency, railroads use substantially less fuel to transport goods than trucks;
• Not affected by increasing traffic congestion; and
• There are only six Class I railroads in North America, making it simple to compare them.

Operating ratio is a key metric of railroad performance. It is basically a measure of profitability and shows the percentage of revenue used to operate the railroad. A lower operating ratio is better, as more revenue is falling to the bottom line or available to reinvest in the business. Over time, if the operating ratio is decreasing, the railroad is increasing profits. Railroads with lower operating ratios have more cash to reinvest in the business or return to shareholders in the form of dividends and buy backs. They also earn more for each additional dollar in revenue.

Despite being such an important measure, the operating ratio is easy to calculate. The operating ratio is simply operating expenses divided by revenue. Both items can be found in the annual report under the Consolidated Statement of Income, Consolidated Income Statements, or similar. This is generally at the back of the report to discourage investors from actually reading it.

A few conclusions can be drawn from the above table. First, Canadian National (CNI) has the lowest operating ratio, which is a sign of effective management. Second, Norfolk Southern (NSC) shows the most improvement over the five year average, a decrease of 11.9 points. This implies management has been successful at controlling costs and increasing efficiency. Additionally, NSC has the second best operating ratio of the railroads compared. Union Pacific (UNP) has the highest operating ratio, a sign of poor management. Their operating ratio, while improving on a year over year basis, is also above the five year average. This means management is getting worse over time. While CSX currently has the second worst operating ratio, they have the second highest decrease over the five year average at 10.1 points. For the industry as a whole, operating ratios declined from 2005 to 2006 and were well below the 2001 - 2005 average.

While important, the operating ratio is not the only measure of railroad performance. Several more will be posted in the future. Check out the next article in the series, Railroad Performance Measures: Yield.

Since this shit is boring, a little inspiration is in order:

notes:

Annual reports are available at the following web addresses:

• BNSF Annual Reports
• Canadian National Annual Reports
• Canadian Pacific Annual Reports
• CSX Annual Reports
• Norfolk Southern Annual Reports
• Union Pacific Annual Reports