When I reached my 100th post I wanted to mark the occassion with something special, and I did by examining some of the quality companies that had withstood the test of time for more than 100 years: 692 years strong: Citi, BUD, AT&T, JNJ, & UPS.. This being my 200th post I tought about reviewing companies that have been around 200 years,
But then I got a better idea. I have been working on the railroads. Not literally, but as potenial investments. A few look very interesting.
I ran the seven major U.S. freight railroads through my own screening process. In the past month I have looked at CSX and NSC but did not take any action except to add them to my watch list. My first screen was for low price-to-sales P/S and low price-to-book P/B ratios in search of a deep value opportunity.
- Burlington Northern Santa Fe (NYSE: BNI) P/S = 2.04, P/B = 3.02
- CSX Corp (NYSE: CSX) P/S = 2.03, P/B = 2.08
- Florida East Coast Industries (NYSE: FLA) P/S = 4.7, P/B = 3.18
- Genesee & Wyoming'A' (NYSE: GWR) P/S = 2.37, P/B = 2.19
- Kansas City Southern (NYSE: KSU) P/S = 2.02, P/B = 1.75
- Norfolk Southern (NYSE: NSC) P/S = 2.29, P/B = 2.21
- Union Pacific (NYSE: UNP) P/S = 1.82, P/B = 1.9
After reviewing the P/S and P/B ratios none of these stocks seemed like a deep value. The first one to be cut was the Florida East Coast Industries. FLA is up 18 percent over the past year and is near its 52 week high of $65.15, closing Thursday at $63.36. A value it's not. It also holds commercial and industrial real estate and is one of the smaller lines.
Next, I examined the return on invested capital (ROIC), which is indicative of how well management is allocating company resources. I also looked at whether the company pays dividends. Dividend paying stocks historically have outperformed over time.
- Burlington Northern Santa Fe (NYSE: BNI) ROIC = 12.79, Yield = 1.22%
- CSX Corp (NYSE: CSX) ROIC = 10.78, Yield = 1.18%
- Genesee & Wyoming'A' (NYSE: GWR) ROIC = 19.36, Yield = None
- Kansas City Southern (NYSE: KSU) ROIC = 6.47, Yield = None
- Norfolk Southern (NYSE: NSC) ROIC = 11.08, Yield = 1.72%
- Union Pacific (NYSE: UNP) ROIC = 8.87, Yield = 1.36%
Though the Kansas City Southern did pretty well on the first cut, with no dividend and a ROIC that is not any better than a high quality corporate bond, it didn't make this cut. I considered cuttting Genesee & Wyoming since it has no dividend but it's ROIC is so much higher than its peers that I left it in for the next round.
I then reviewed the price-to-cash-flow, P/CF and long-term-debt-to-equity ratio. If you read any commentary from Warren Buffett you will learn that he looks for strong cash flow as a sign of success and resists investing in companies with a lot of debt.
- Burlington Northern Santa Fe (NYSE: BNI) P/CF = 9.6, LTD/E = 0.7
- CSX Corp (NYSE: CSX) P/CF = 9.02, LTD/E = 0.7
- Genesee & Wyoming'A' (NYSE: GWR) P/CF = 140.48, LTD/E = 0.5
- Norfolk Southern (NYSE: NSC) P/CF = 10.05, LTD/E = 0.7
- Union Pacific (NYSE: UNP) P/CF = 9.89, LTD/E = 0.4
A clear picture seems to be developing here that the 4 major railroads seem to move in lockstep while the regionals have some anomalies. GWR didn't survive this cut. I do not know why it has such a wacko P/CF, but another thing Buffett has said is he does not like to work to hard to figure out what's going on with a company and GWR is an example. There are too many other opportunities.
I saved the illustious price-to-earnings (P/E) ratio for last for good reason. I never use the P/E in my stock screens. The other factors are more important in detemining future success. When I do look at the P/E I often compare it to the return-on-equity, ROE ratio. I might except a high P/E if the ROE is even higher.
- Burlington Northern Santa Fe (NYSE: BNI) P/E = 16.2, ROE = 19.48
- CSX Corp (NYSE: CSX) P/E = 14.77, ROE = 14.75
- Norfolk Southern (NYSE: NSC) P/E = 14.56, ROE = 15.7
- Union Pacific (NYSE: UNP) P/E = 17.63, ROE = 11.19
Looking over the path we have taken it is time to let go of the Union Pacific. It is a stable company but I see no opportunity here that is not broadly available. The P/E ratio is at the market average and the ROE is just too low. That combined with the lower ROIC, and the fact that they seem to be having trouble finding places to invest, and are not building shareholder equity in any meaningful way.
After this very basic review it seems that BNI, CSX, and NSC are worth puting on your watch list, I will add BNI to the two others on mine. The closing prices Thursday were BNI: $82.72, CSX: $40.96 and NSC: $50.98. I think there will be changes in the industry over the next five to ten years. All three could be merged with larger companies or acquired for there substantial real estate holdings and rights-of-way, or aggregated with a major shipping company or trucking company. There are a lot of possibilities.
Time to start on my next hundred stories.
Disclosure: I own JNJ and UPS.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here. the most recent are: Chasing down 007 picks: Q1 is done - Valero is tops and FedEx: When is a downgrade an upgrade?