Revenues increased 18%, approaching $3 billion. Earnings per share from continuing operations skyrocketed 40% to $0.94. As management pointed out, distributors are exploiting railways to the advantage of their supply chains. This is cool for shareholders of CSX, who obviously are hoping their company can successfully navigate the tough economic landscape that we're all trying to find maps for. And if oil prices continue to fall, then CSX may find it easier to manage its operations.
And there's another positive. According to this source, CSX beat analyst expectations by a penny. Unfortunately, according to that same source, management believes that it will hit the lower end of the spectrum in terms of its previous guidance. CSX is looking to earn between $3.65 and $3.75 per share for the fiscal year.
Taking everything together, I'm not sure I'd want to enter CSX at this time. It is well off the 52-week high, but it's not exactly near the 52-week low, either. Even though the energy picture might be moderating for the company, and even though its business does offer a compelling transportation service, I think a macro slowdown might send shares back toward the low. And according to this source, freight volume declined by over 2%. Problems in the automotive industry are negatively affecting CSX. Heck, problems in many industries will be with us for a while. CSX will see its operations pressured. And, again, that tells me that I'd have to see a big drop in the stock to find it attractive at this point.
Disclosure: I don't own any company mentioned; positions can change at any time.
"Railroads are a play on three big secular themes: the drive for increased energy efficiency, growth in coal and the agriculture boom," says Elliott Gue, a energy sector expert who has just returned from Japan where he was covering the G8 Summit.
Meanwhile, in his The Energy Srategist, he states, "Railroads are now among the most fuel-efficient forms of freight transport available." Here, he offers a bullish review of Union Pacific (NYSE: UNP).
"My long-held thesis on the group has been that the railroads are no longer totally dependent on the US economy for their growth.
"It's no longer appropriate to look at this sector as viciously economy sensitive. The traditional relationship between the broader market and the rails has been breaking down for several years, but this trend appears to be accelerating.
"In 2007, according to the Association of American Railroads (AAR), the average railroad moved a ton of freight a distance of 436 miles on a single gallon of diesel fuel. That makes freight trains roughly three to four times more fuel efficient than trucks.
"Union Pacific is the largest railroad in the US and has long been one of my favorites. The company's network is nearly 33,000 miles long and is concentrated in the West and Midwest. It also offers a convenient example of the bullish forces at work for the rails, particularly in the coal and agriculture industries.
"Having spent a lot of time recently studying the North American transportation industry, my conclusion is that trucking is on the decline while the railroads are poised to increase market share," notes Tom Slee.
"Who would have thought it? Railways are having a good year. They were supposed to be hunkered down, riding out the recession. Instead, the old iron horse is thriving.
"Surging demand for commodities is more than offsetting a slump in building materials shipments. Even higher energy costs are proving a plus for the railroads. Each jump in oil prices gives them a bigger edge over their gas guzzling competitors: trucks.
"Most important, the rails are able to raise rates despite the economic downturn. Their surcharges are sticking. Yet the stocks are out of favour.
"The railroad sector is one of the few reliable groups in today's market; with solid pricing power, these companies have a solid future moving forward," says contrarian Chris Johnson.
"We are adding CSX Corp. (NYSE: CSX) as a long position to the Insightful Investor portfolio. Here's his look at the stock, and an options play for those seeking leverage.
"Last week, our Earnings Tip Sheet highlighted CSX as a bullish pick ahead of earnings. The stock was positioned for a jump according to our Behavioral Valuation approach. One week and a positive earnings report later, we're looking to increase our exposure to the company.
"CSX has now reported earnings results that handily beat both the analyst forecast and the whisper number. The company overcame softness in some sectors through increased shipments in ethanol and grain as well as increased foreign demand for coal.
"Rail companies appear strong moving forward, given that rising crude oil prices are forcing companies to use more cost-efficient means to ship their goods.
"What's more, CSX was the first of the 'big four' rail companies to report earnings. The company should thus benefit from positive reports when its competitors enter the earnings confessional.
Railroad giant CSX Corporation (NYSE: CSX) recorded record revenue of $10 billion for FY2007, the first time the company has crossed that threshold. CSX also posted record gains for 4Q 2007. EPS increased 15% to $0.86 per share on net earnings of $365 million. 4Q operating income increased over $100 million to $609 million.
CSX posted good revenue and productivity growth despite being hit with big increases in fuel costs. The company also posted significant improvements in its safety record. Over the past three years, CSX has posted the highest share price gain of any major railroad in North America, gaining 10% in just the last two days.
CSX CEO Michael Ward forecasts double-digit growth in both operating income and EPS for 2008. The stock currently trades in the mid-40s and may be worth a look for investors seeking some stability in the stock market.
Readers of this space know that the preference here is for large cap companies, with demonstrated business models, and favorable long-term factors, that have the resources to ride-out short-term economic downturns, including recessions.
And in this category a railroad stock represent a prudent addition to a portfolio, for investors who can tolerate moderate risk.
Pick a railroad. Virtually any railroad. Odds are, you will do fine, long-term, as the nation continues to re-discover the valuable asset - - the national treasury, really - - of its railroads. (More on that latter topic, in a future blog.)
Here are the railroad plays, ranked by risk, with the top stock, BNI, being the lowest risk. A stop/loss, if one were to buy the stock, is also listed:
The revival of the rails is not exclusive to the United States. Canada is seeing a healthy growth in railroad services, and Canadian Pacific (NYSE: CP) is worth an evaluation.
Analysts see 5.7% revenue growth for CP in 2008, in Canadian dollars, with grain, fertilizer and oil sands-related shipment gains offsetting declines in forest products.
Also of note: Analysts also expect CP to continue to improve rail system efficiency and fluidity, and overall asset utilization.
The above positives, combined with CP's strong free cash flow and modest pricing power, make the company an acceptance investment for moderate-risk investors. CP's modest p/e of 13 also tips the risk/return ratio to the purchase side of the scale. The Reuters F2007/F2008 EPS consensus estimates for CP are C$4.27/C$4.78. [Note: Currency figures are in Canadian dollars].
The risks? Like other rails, Canadian Pacific is vulnerable to the economic cycle, hence a slowdown in the global and/or U.S./Canadian economies will hurt CP's results.
Stock Analysis: Canadian Pacific is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from CP's shares. Sell / Stop Loss for the shares in this company: $44.
Most transportation officials agree that the United States' transportation infrastructure - - highways, roads, bridges, mass transit systems - - is in need of a major upgrade in order to meet the nation's transportation needs of the 21st century.
The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern Corp. (NYSE: NSC) is a railroad worth a review.
Norfolk Southern provides rail transportation in the eastern U.S. and Canada, operating a 21,000-mile rail network. It's an elaborate intermodal and coal service network that also has a large freight business.
To say the bears on Wall Street have gained some momentum in late November 2007 would be an understatement.
The consensus now argues that U.S. GDP growth has slowed substantially, with growth likely to remain sub-par through at least June 2008, and the Dow's 1,400-point drop in about a month reflecting that consensus.
Nearly every sector looks vulnerable. Still, some sectors are faring reasonably well. The rails are one, and among the rails, Burlington Northern (NYSE: BNI) is worth an evaluation.
For nearly 30 years, the rails -- long neglected in the United States -- were considered passé. Then the globalization era dawned, along with its exports and demand for agricultural products and coal. Add intermodal shipments and a price of oil that's basically risen for ten years and the results is - the rails are back.
Over the past year, transportation stocks have lagged other shares. Since last October, for example, the Dow Jones Transportation Index has lost 5.1%, while the S&P 500 index has gained 13.25%.
But not all stocks in the transport group have tracked the index. Railroad shares, for example, have outperformed both the sector and the overall market, with the S&P Supercomposite Railroad Index (a sub-index of the S&P Composite 1,500 index) rising by 17.3% over the period. That compares to, say, the S&P Supercomposite Trucking Index, which has dropped by 6.6%
Among the reasons for the relative strength in railroad shares: interest from value investors like Warren Buffett, and the fact that rising oil prices don't hurt this segment as much as other, more fuel-dependent industries.
Still, some might argue that at this point, much of the news, whether good or bad, is probably factored into prices. If you combine that with the fact that the railroad sector is back to long-term resistance levels relative to its trucking company counterpart, that suggests it might be a good idea to sell the former and buy the latter.
Otherwise, given a worrisome economic outlook and the relative underperformance of the transportation sector generally, it could be time for those who've been riding the rails to jump off the train -- before it runs out of track.
Given investors anxiousness about the economy and hearing more gloom and doom than I think is warranted, I thought I would get back to basics with "my pal" Warren, and add to the series I started several months ago. I decided to write the series after receiving encouragement from friends and associates that read With Warren Buffett by my side ....
Today, I am writing about the concept of Durable Competitive Advantage, which is the ability to get ahead and stay ahead with a high level of certainty. It is also referred to as Sustainable Competitive Advantage.
To achieve a Durable Competitive Advantage, several factors have to be present. One is a big moat (Buffett expression) surrounding the enterprise. This usually means businesses that sell commodities where price is the primary factor in determining opportunity, have no moat as price takers. Their profit margins are not easily defendable. Another factor is barrier to entry. How easy would it be for someone to enter the same business and compete? The T-shirt business is a good example, of something without a Durable Competitive Advantage. Anyone could enter this business in one day, and they do. So unless the business has some unique concept, it does not have the promise of relatively predictable and sustainable profit margins in the future.
Large investors such as Warren Buffett and Carl Icahn, as well as hedge funds, have invested more than $8 billion in railroad stocks, calculating that strong business conditions for the rails will continue. But are they on the mark or late to the railroad party?
The modest traffic dip - attributable primarily to the sluggish conditions in certain U.S. economic sectors - is not insignificant, analysts say. Still there are several long-term secular trends that suggest that the rail's recent strong run is far from over.
First, U.S. imports/exports remain strong: rails play a large role in transporting goods from and to coastal ports. Energy costs are driving part of this traffic increase: as diesel and gasoline prices rise, rail transport becomes a better transport value for many businesses/customers.
Second, commodity demand -- particularly in emerging-market and recently-developed countries -- is strong, and is expected to remain solid in 2007 and 2008, as the global economy continues to expand at a greater than 4% rate.
Further, the major U.S. rails are the survivors -- winners, really -- of a sector that scaled down and decreased the number of providers in the 1970s and 1980s. Translation: the rails have a pricing power advantage with regard to many contracts and clients.
In Thursday afternoon trading, Burlington Northern gained 74 cents to $87.87, Union Pacific rose $1.06 to $118.81, and Norfolk Southern climbed 74 cents to $55.31.
To be sure, if the U.S. economy dips into a recession, or if the global economy slows dramatically, the investments by Buffett, Icahn, etc., would then look like riskier ventures, but so long as the secular trends remain in place, their calculation appears to be prudent, to say the least.
Warren Buffett's recently announced investments in railroads have caused many to consider this sector. But with stock prices for rail operators up sharply since the news, investors might want to consider another track to invest in the sector.
Indeed, one advisor who was already riding the rail sector is Elliott Gue, contributing editor to Personal Finance newsletter, who recommends a trio of companies that make and lease railcars.
First up is American Railcar Industries (NSDQ: ARII). Gue notes that deliveries of is railcars soared 32% in the final quarter of 2006, primarily by sales of ethanol tankers.
He adds, "In addition to ethanol demand, there's a strong replacement cycle underway in the tanker car business. Specifically, new government safety requirements are forcing shippers to upgrade and replace their older carriers with safer models."
All I can say is if you want to improve at something seek out the best advice you can get and try to follow it. If I was studying golf and Tiger Woods was willing to coach me, that would be the best opportunity I could hope for. If I wanted to improve my jump shot and Kobe Bryant had some spare time to work with me, that would be fantastic.
Well, guess what, if you are an investor there is a wealth of information available, and you can learn from the best. The best is Warren Buffett and you should do what he does. That is what I have been trying to do. I have been discussing Buffett in many of my stories and reminding people that he is the master and if you are doing anything else you are missing the point. Sure Smush Parker is also a starting guard for the Los Angeles Lakers, and that is amazing because the odds of being a starting guard in the NBA are astronomically small, but I would rather learn from Kobe.
So you can quote anybody you want and search far and wide for opportunities, but if you consider yourself a shrewd investor and are not studying Buffett you are making a mistake.
In late December, Avista Capital Partners agreed to pay $530 million for the Star Tribune, less than half of what McClatchy paid for it in 1998. The deal comes amid growing concerns about the future of newspapers, which are facing competition from the Internet. But in spite of the ugly long-term outlook for newspapers, they may make an interesting investment for now.
For starters, Avista is purchasing the newspaper for 6.5 times its cash flow. Newspapers don't have the large capital expenditure requirements that many more booming businesses do. The industry is in decline, but it's still making money. I'm reminded of a profound statistic that I first read about in Jeremy Siegel's book The Future for Investors: Since 1957, railroad stocks have outperformed airlines, trucking, and the S&P 500.
This is of course not attributable to dramatic growth in the railroad industry. Rather, most investors saw that the companies were in decline and the share prices were driven down, and then provided a good return. The moral of the story: valuation matters. Most stocks are a good deal at the right price.
Are newspapers the new railroads? There are numerous similarities. Railroads were replaced by airplanes and trucks, but the railroad stocks were the better investment. Newspapers are being replaced by the Internet, but that in no way means that Internet stocks are better buys. Here's a quick look at some of the bigger newspaper stocks:
Gannett (NYSE:GCI): Owner of 91 daily newspapers, including USA Today. The also own around 1,000 non-daily publications. Trades at around 11 times cash flow.
E.W. Scripps (NYSE:SSP): Owns some newspapers, but also television stations, including HGTV and the Food Network. Also owns Shopzilla.
Tribune (NYSE:TRB): Trades at around 8 time cash flow. Owns 11 daily newspapers, the Chicago Cubs, television stations, and other media interests.
CSX (NYSE: CSX), a transportation company whose competitors include Burlington Northern Santa Fe (NYSE: BNI), Norfolk Southern Corp. (NYSE: NSC), and Union Pacific Corp. (NYSE: UNP), reported earnings for the third quarter on Tuesday. The results weren't bad, driven in part by a drop in energy costs and an effort to keep costs under control. 
Over the past year, transportation stocks have lagged other shares. Since last October, for example, the 
Given investors anxiousness about the economy and hearing more gloom and doom than I think is warranted, I thought I would get back to basics with "my pal" Warren, and add to the series I started several months ago. I decided to write the series after receiving encouragement from friends and associates that read 
Stock picks and pans for troubled times: RIMM, ED, ISRG, GLW, LEA, SLB, GOOG ...
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Closing Bell: Torch Passing on a Friday Rally
