Railroads Chug Along

We at Max's Investment World love the unglamorous and what could be more unglamorous than railroads? Built in the last century, they are seen as outmoded, inefficient and just plain dirty businesses.

But that doesn't mean that railroad companies aren't good investments. Indeed the entire industry is incorporating new technologies, selling assets and generally becoming more efficient.

One key market for railroads is coal, which represents about 25 percent of revenues for railroad companies. Coal is abundant and cheap compared to nuclear and other types of energy. While cogeneration in the utility industry is increasing, it still only represents a minor piece of total power generation. And U.S. companies are increasingly exporting coal for use in steel making and power generation. Analysts at Morgan Stanley and elsewhere expect that coal production and coal transportation by railroads will continue to rise this year, boosting profits in the process.

Grain is another critical market, which accounts for about 10 percent of revenue. Exports of U.S. grain are surging due to huge demand in China and other parts of rapidly growing Asia.

Railroad companies are also becoming more efficient. They are adding tracks to routes they already own so more traffic can pass through a given area. And they are selling freight yards, trains and buildings. CSX, for example, cut the number of its cars by 21 percent over the last five years, so cars it does own are used more frequently and more profitably.

Companies are also cutting labor costs by investing in automated controls for trains and yards and computer inventory systems that allow them to track trains and shipments in real time.

Bottom line: railroads are coming around the mountain and into the land of profits.

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