Back on track: Railroads are acquiring competitive edge in shipping

Published: Sunday, July 1, 2007 12:07 a.m. MDT
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Nobody likes the rising price of oil better than U.S. railroads.

As the cost of crude soars, rail is gaining a competitive edge after losing ground to trucks for half a century. Even as automotive plant closings and reduced U.S. housing construction have contributed to a 4.4 percent drop in train shipments this year, investors including Warren Buffett and Carl Icahn are flocking to railroad shares, betting that higher oil prices and surging Asian imports along with congested highways will boost long-term demand.

"Earnings and stocks could quadruple within five years, which makes the stocks a bargain today," said Snehal Amin, a partner in London-based TCI Fund Management LLP.

Rail shipping volumes grew to a record in 2006, boosting shares and earnings at the four biggest operators, Union Pacific Corp., Burlington Northern Santa Fe Corp., CSX Corp. and Norfolk Southern Corp. The Standard & Poor's 500 Rail Index has tripled since March 2003.

As the price of oil climbed 37 percent in five months from Jan. 18, shares of Union Pacific, based in Omaha, Neb., the biggest U.S. railroad company, gained 24 percent. Shares of CSX, based in Jacksonville, Fla., the third-largest, rose 26 percent.

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"Railroads typically are about three times more fuel-efficient than trucks," said Jason Seidl, a New York-based analyst at Credit Suisse. Higher fuel prices "will drive up the differential."

Rail's rise and fall

Credited with having "built America," railroads were once key to U.S. westward expansion and economic growth. The first transcontinental railroad was completed with federal backing in 1869, linking the Western and Eastern halves of the country with a mechanized transportation system for the first time.

Almost a century later, railroads started losing out to trucks after the interstate highway system was begun in 1956. Trucking gained further when interstate speed limits were raised in the late 1980s.

Trucks carried 69 percent of domestic U.S. freight in 2005, up three percentage points from 1994, according to the American Trucking Associations, based in Alexandria, Va. Railroads moved 13 percent, down two points in the same period, while planes, pipelines and waterborne vessels accounted for the rest.

Higher oil prices suggest the trend may be reversed.

"We expect the rails, after 40 years of ceding volumes to the highway, to take back market share over the next 10 years," wrote Edward Wolfe, a New York-based analyst at Bear Stearns & Co., in a May 7 report to investors.

While trucks offer a cost advantage on most short hauls and can reach places not accessible by rail, they consume about four times as much fuel to move a shipment as a train does, according to U.S. Energy Department data. Shipping rates are about five times higher for trucks than trains, said Amin of TCI, which is the fifth-largest shareholder of CSX, according to Bloomberg data.

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Tom Smart, Deseret Morning News

Union Pacific trains in a rail yard in Salt Lake City. Union Pacific is largest U.S. rail company.

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