8/15/2013 8:45 PM ET|
Buy the next Union Pacific railroad?
Short-line operator Genesee & Wyoming has quietly emerged as one of the nation's most promising companies in an industry being revitalized by the need to move oil and gas.
When Warren Buffett's Berkshire Hathaway (BRK.B) bought out the Burlington Northern Santa Fe Railway for $44 billion in 2010, there was lots of speculation about which big railroad giant would be the next takeover target.
So far, none has changed hands. In fact, the seven private Class 1 railroads, which carry some 69% of rail traffic in the United States, are bigger than ever and have made huge investments in computerization, rolling stock, and track and distribution improvements. They are far more efficient than a decade ago.
And their stocks have had a big year so far in 2013. Shares of the six publicly held Class 1 railroads are up 22.3% this year. Berkshire Hathaway is up nearly 31%.
Sounds like there's no room for anyone else in the railroad business, right? That may be shortsighted.
More 'Next Great Companies': The next Safeway | The next Ford | The next Intel | The next Disney | The next B of A | The next Boeing | The next Wal-Mart | The next Starbucks | The next Amazon.com | The next Exxon | The next Apple
Another player is starting to emerge: Genesee & Wyoming (GWR). It may join the Class 1 railroads, or it may get bought out. Either way, it looks like a winner for the long run if you watch the price moves and get into the stock on a pullback.
Here's a look at why.
The players old and new
The Class 1 railroads are Union Pacific (UNP), Burlington Northern Santa Fe, Norfolk Southern (NSC), CSX (CSX), Kansas City Southern (KSU) and the U.S. subsidiaries of Canadian National (CNI) and Canadian Pacific (CP).
Union Pacific is the largest, a $73 billion company. Genesee's market value is a mere $4.5 billion.
Genesee & Wyoming is technically a short-line railroad operator -- the largest operator of small lines that big railroads don't want but American business needs. These are short-distance lines that serve a few locations or industries, or hauls cars for larger railroads. Genesee & Wyoming has been an aggressive acquirer in that business since the 1980 Staggers Act that deregulated the railroad industry.
Thanks to 39 acquisitions since 1980, Genesee owns or leases more than 109 railroads in 39 states, as well as several small lines in Canada, totaling some 15,000 miles of tracks. These include the Buffalo & Pittsburgh Railroad, the Central Oregon and Pacific Railroad, the Little Rock and Western Railway, the Texas Northeastern Railroad and the Western Labrador Rail Services, which runs two small lines transporting iron ore for mining companies.
It also operates a 1,400-mile railroad in Australia and has operations in Belgium and the Netherlands. It handles port services in 26 Gulf Coast and East Coast markets and does contract coal loading in Wyoming.
In 2012, it bought RailAmerica, a rival short-line operator from Fortress Investment for $1.4 billion. The deal, Genesee & Wyoming's largest, was made possible when Carlyle Group, one of the biggest private equity companies, invested $800 million in the company, taking an 11% ownership position. The deal doubled Genesee & Wyoming's size. Its closest rival now is Iowa-Pacific Holdings.
Up almost 38% a year
More than a few folks took notice. As CEO John Hellmann said during the company's recent conference call, "We definitely get the seat at the table for some larger transactions in a way that we might not have had before."
Genesee & Wyoming should gross $1.59 billion in 2013 and $1.7 billion in 2014. It's come a long way in recent years. Revenue was just $244.8 million in 2003.
The stock was ahead as much as 24.9% on Aug. 1 before pulling back. Trading around $88, it is still up 15% this year, in part because the Australian dollar fell 12% against the dollar and hurt the results of its Australian business.
Over the last five years, the stock has risen nearly 38% a year, performing as well as Union Pacific and Kansas City Southern, both star performers.
Some of the gains are due to the big gains railroads have enjoyed in recent years; the Dow Jones U.S. Railroad Market Index ($DWCRAI) has climbed 32.7% a year since the 2009 market low. Those stock gains reflect increasing investor approval of their business models and the belief that transportation stocks are as good a leading indicator for the economy as you can find.
A rail revival
Genesee & Wyoming began as a 14-mile line built to get salt from a mine in Wyoming County in upstate New York to nearby Rochester, which is in Genesee County. The company went into bankruptcy in 1899 and was bought by Edward L. Fuller, the owner of the salt mine. The road was later sold off but, in 1977, was bought by Mortimer Fuller III, Edwin Fuller's great-grandson.
The company is now a sizable coal shipper, and coal is coming back. The line also moves chemicals, automobiles and building materials. All are recovering from the 2008 to 2010 recession. Traffic also suffered through droughts that cut back harvests of corn, soybeans, wheat and other farm commodities.
Genesee is following the lead of its larger competitors (who are also its partners) in investing in new locomotives, track upgrades and the like to compete more effectively against trucks in particular for new business. The results have been stunning, as The Wall Street Journal noted in March. The big railroads are taking business away from trucks because they've been able to deliver on their promises of prompt and efficient delivery.
But right now it may well be in the right place at the right time.
Copyright © 2014 Microsoft. All rights reserved.
The company complains after the son of Florida State's football coach is televised wearing -- gasp -- Under Armour.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.