Mr. Toby Kolstad

GLG News by Mr. Toby Kolstad, President

GLG News is now G+ Insights

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More than floods in the Midwest are to blame for railroad traffic losses

July 1, 2008

Analysis of:US rail shipments fall 5.7 percent amid floods | biz.yahoo.com

The Association of American Railroads (AAR) reported that the Midwest Floods “continued to negatively impact rail freight traffic” during last week, a statement easily verified by a quick check of the weekly carloads of the UP RR which showed at 10% drop in carload for the week ending June 21. However, the Eastern railroads which have very few if any lines in the area suffering from swollen rivers, namely CSX and NS, reported carload losses of 8% and 5% respectively. More importantly, a continuing trend in decreasing carloads began in early May and has brought the year over year traffic gains of 1.1% posted on May 3rd down to only 0.3% on June 21st.

Railroad auto business is not the only traffic segment facing serious cutbacks in coming months

June 23, 2008

Analysis of:Analyst says autos to drag on rails | biz.yahoo.com

The recent announcements of major cutbacks in US light vehicle production will definitely have a negative impact on both railroad traffic volumes and railroad profits. While this traffic only accounts for only 5% of all US carload shipments, its hefty margins contribute much more to the bottom line than other traffic segments. However, more serious problems relate to the potential decrease in grain traffic during the current grain year due to the weather and flooding problems in the Midwest. After the 1993 floods, grain traffic fell 30%, and this traffic segment accounts for 8% of US railcar loads.

Demand for coal cars will increase, but so will Freightcar America’s competition for orders

June 12, 2008

Analysis of:Coal Fuels FreightCar | www.forbes.com

Overlooking the author’s tendency for hyperbole and his greatly distorted timeline of history, his conclusion that demand for new coal cars will soon return is right on target. He is also right in highlighting the current danger to those builders who might be exposed to fixed price contracts and escalating steel and specialty parts costs. However, he overlooks one crucial new element in the market for coal cars that Freightcar America (FCA) did not face the last time demand surged for its products: competition. In 2004, the last time buyers changed course and began ordering cars, FCA enjoyed an almost 100% market share. This time however, they will have to contend with a resurgent Trinity Industries (TRN).

Leasing companies order and/or buy railcars, not railroad companies; and therein lays the problem

June 6, 2008

Analysis of:Where Have All The Railcars Gone? | www.forbes.com

The in Forbes article about the large number of surplus railcars, the author incorrectly blames the railroad companies for stocking up on ethanol cars until the “ethanol bubble burst” and they realized they had built too many cars. In truth, railcar leasing companies ordered the cars after hearing requests and projections by ethanol companies about the need for more equipment to handle future production from new capacity that was either planned or already under construction. That new capacity is still coming online, albeit at a pace much slower than originally expected, and there may be a few thousand “surplus” cars until production catches up with car supply in 2009.  The ethanol phenomenon has mitigated some of the other problems faced by the railcar industry that can be more correctly blamed on the railroads.

Railroad Intermodal traffic will probably not rebound for quite a while

May 29, 2008

Analysis of:Soft international container demand drives down total Q1 intermodal volume, IANA says | www.progressiverailroading.com

IANA (Intermodal Association of North America) reported that the first quarter intermodal volume was down 2.4%, almost identical to the decline reported by the AAR several weeks ago. Not surprisingly, the decline in imports was cited as the main reason for the decline, although the losses were partially offset by tenth consecutive increase in domestic shipments. Although it was forecasted that imports should improve at a healthy pace once the current bout of economic weakness passes, no guess was made as to when that might occur.  Our guess is that railroads may be in for a long wait for that to happen.

UP freight rates for Powder River coal are found to be excessive by STB

May 22, 2008

Analysis of:Union Pacific must cut coal rates for KC utility | biz.yahoo.com

The Surface Transportation Board ruled that the freight rates that the Union Pacific Railroad unilaterally imposed upon Kansas City Power and Light in 2006 for the transportation of their Powder River Coal were in excess of the board’s guidelines for a carrier that had market dominance. Since the STB used an easily understood methodology in reaching this decision, this may be the first of many challenges to the railroad freight rate increases since 2006, often characterized as their newly discovered “pricing power”.

Trade Mag. finally gets it right; CSX is on the road to recovery after years of poor management

May 16, 2008

Analysis of:CSX powers up for a fight | www.railwayage.com

Trade magazines are usually constrained to write only positive comments about the companies in the industries they cover, since subscriptions and ad revenues are more dependent on goodwill rather than good investigative reporting. In the article reviewed below however, the writer/editor finally fesses up, CSX was poorly managed in the past, and much of the blame belongs to the ex-Chairman/CEO, John Snow. The article goes on to heap the usual praise on the new management team assembled a few years ago by Michael Ward, probably trying to aide in their defense against the corporate raid being staged by the TCI fund.

Coal car builder Freightcar America blames poor economy while coal traffic is up 4%

May 9, 2008

Analysis of:UPDATE 1-FreightCar profit plummets, cites economy, costs | www.reuters.com

CEO’s never like to go into lengthy explanations on the dynamics of their industry in explaining a dismal financial performance, but with year to date coal volumes up 4.6%, according to the most recent AAR report, blaming the economy for the problems besetting the company seems more like dodging the issue than helping shareholders understand the situation. The new president of FreightCar America cannot be blamed for how the company found itself in these waters, but a better explanation of the problems might have given shareholders more confidence in his ability to navigate the company in the future.

New car production losses at Greenbrier (GBX) are eating into overall profits

April 18, 2008

Analysis of:Greenbrier Q2 profit misses Street estimates, shares fall | www.reuters.com

During the last downturn in the railcar building industry, Greenbrier gained market share while cutting back production since the cars it produced were more popular that the car types manufactured by the other builders. This time around, just the opposite is true; there is almost no demand for the intermodal well cars, lumber flats, and boxcars that carried Greenbrier through the last recession, but there are still buyers for the coal, tank, and grain cars manufactured by the other railcar builders. In response to market conditions, Greenbrier closed its Canadian plant last year and began to solicit orders in other car types such as covered hoppers and tank cars. Manufacturing margins for these car types will be slim for a while as Greenbrier buys its way into these new markets. In the mean time, its plants are not operating at the levels that are necessary to earn a profit in this marketplace.

Right conclusion, but faulty reasoning that prospects for FreightCar America are not good

April 11, 2008

Analysis of:Derailed Growth at FreightCar America | seekingalpha.com

Per the author(s) of this blog, 10Q Detective, the prospects of increasing demand for railroad coal cars is not good and therefore the chances of accelerating growth at Freightcar America is also poor. There is so much that is wrong with this article and how it analyses the demand for new coal cars that it is hard to see how they managed to get to the right conclusion that the future prospects for Freightcar America are less than positive; but they did. Notwithstanding the current trends in railroad coal traffic (up 4.3% for the year), demand for coal cars is going to be soft for the next few quarters. Since coal cars are the main product of FreightCar America, its railcar deliveries will be lower in 2008 than in 2007.  

Tight capacity is one of the preconditions for railroad pricing power, so why worry about it?

April 8, 2008

Analysis of:Rail: Operators choose parallel paths to the same destination | us.ft.com

For almost 100 years, or since 1921 to be precise, the railroad industry has been shedding excess capacity and abandoning lines and terminals. For most of that time, unfortunately, it was also losing traffic to other modes of transportation, primarily to the trucking industry. It was only recently that the railroads finally realized that they had abandoned too many lines and that excess capacity was no longer an issue. BNSF had to buy back a line they had sold that went from Seattle across the Cascade Range, and UP has been busy relaying some of the double track the SP had removed from the Sunset Route in the early 1990s. (The SP president was named the Railroad Man of the Year for that and similar feats.) With capacity tight, the railroads learned that they could charge more for their services and be somewhat indifferent to traffic losses as long as they were operating at or near capacity. Why would a company in such a situation be in any hurry to build more capacity?

Idle cars mean cutbacks are coming for railcar builders.

April 2, 2008

Analysis of:Weak Economy Slows Cargo, Idles Railcars | biz.yahoo.com

The decline in trailer and container shipments, especially those originating at West Coast ports, has resulted in a large surplus of railroad intermodal cars, specifically the doublestack well cars used to handle containerized imports. BNSF (NYSE:BNI) has been reported to have parked thousands of well cars around its system. Other railroads are reporting, however, that surplus quantities are no greater than might be expected at this time of year due to the seasonal nature of this traffic. Nevertheless, with traffic down significantly from last years’ levels (-4%), it’s hard to imagine how the seasonal railcar surplus looks normal.

CSX Exec boasts confidence in continued turnaround

March 26, 2008

Analysis of:CSX predicts higher earnings through 2010 | jacksonville.bizjournals.com

Mike Ward said that CSX would continue to enjoy double digit earnings growth for another few years, and he put an exclamation point to his forecast by boosting the share buyback program and increasing the dividend on these shares outstanding. His inspiring words however, might just have been an opening salvo against the investment funds who want to scale back CSX’s capital investment programs in order to reward their short term investments. It’s a shame that such bravado is necessary, but it would also be a pity if The Children's Investment Fund and 3G Capital Partners were allowed to loot the CSX treasury for their short term gain at the expense of other investors and perhaps the US taxpayers if they set up another Conrail type bailout in the future.

Limited ethanol distribution channels and slowing production growth means surplus railroad tank cars

March 25, 2008

Analysis of:Weekly US ethanol profits steady depite corn rise | uk.reuters.com

Two years ago, the ethanol industry went into overdrive in expanding production facilities and ordering railroad tank cars to move the expected flood of new production. No one, however, looked at how the ethanol was to be handled at the customer end of the distribution network and that has produced a major problem for the new industry. Even with corn prices well above $5.00 per bushel, ethanol producers could make about $0.20/per gallon if they could get their product to the final customer, the US motorist. Unfortunately, there are only four terminals ready to handle unit trains of ethanol and the shipment of small carload lots is just too slow to move the expected production. Tank car lessors who ordered large numbers of railcars to move ethanol have been left holding the bag this time waiting for the gasoline distributors to get with the program.

Railroad freight rate increases are only reason for increased profits and share buybacks

March 13, 2008

Analysis of:Why Warren Buffett is buying railroads | biz.yahoo.com

It’s hard to argue with success, and success is what the railroads are currently achieving after a decades -long battle for survival with their highway and barge competition. While all modes of transportation saw freight traffic soften in recent quarters, only the railroad companies have been able to maintain their profit growth. Praise is coming from all quarters and investors are being encouraged to join the likes of Warren Buffet in buying into the rail industry. The high P/E ratios are said to be justified by the prospects of double digit profit growth for several more years. Notwithstanding all the hype about productivity, the problem is, all of the recent growth in profits has been due to freight rate increases, and it must be questioned how many more years these annual increases can be maintained.

Chill in ethanol industry may give railcar lessors a bad cold

March 10, 2008

Analysis of:Sector Snap: Ethanol Stocks Plummet | www.chron.com

The growth rate of the ethanol industry has slowed significantly in recent months as the price of corn pinched the profit margins of most firms and put some inefficient producers out of business.  With corn prices at $5.55/bu., reformulated gasoline (ethanol) prices must be above $2.00/gal just to break even, and prices last summer dipped as low as $1.50/gal. after a small surplus of ethanol developed. As uncertainties about costs, prices, and demand increase, producers are scaling back their plans for expansion.  Railcar lessors however, have already committed to buy, or have already taken delivery of enough railroad tank cars to move the previously projected production total of 10 million gallons 2008. Car surpluses are developing as lessees walk away from commitments, a rarely used and dangerous practice for most users in that industry.

Ag and Coal are lifting railroads above economic potholes.

March 3, 2008

Analysis of:Rail volume up 2.1% in latest week | www.railwayage.com

The two largest railroad carload traffic segments, Agricultural products and Coal, are once again flowing in record quantities after a disappointing performance in 2007. Grain traffic is up 17% for the first 8 weeks of the year and coal shipments are up 3.4% for the year following increases last week of 18.3% for grain and 4.8% for coal compared to the same week last year. Traffic segments related to construction and the domestic economy in general were all down, except for Chemicals which include ethanol (up 3.7% YTD). The largest segment by revenue, Intermodal, was also down for the year, -3%.

Railroad Pricing power being fueled by boom in commodity prices

February 20, 2008

Analysis of:Global demand lifts grain prices, gobbles supplies | www.usatoday.com

Railroads, both large and small, have managed to keep raising freight rates each year, even as some of their traffic segments have suffered declines in loadings and ton miles. Although the data is still incomplete, it does not look as if the rate increases are to blame for these traffic losses. Moreover, opposition to the freight rate increases has not grown significantly and regulatory laws that have been promoted by groups such as CURE are not likely to be passed in the near future. If there is one factor that has been responsible for this situation it is the steady increase in commodity prices during the past few years, and rail freight rates should be able to keep rising as long as commodities keep getting more expensive.

Icahn is known for his patience and he will need it with Greenbrier (GBX)

February 6, 2008

Analysis of:Icahn Owns 9.5 Pct of Railcar Maker | biz.yahoo.com

Carl Icahn’s purchase of a 9.5% stake in Greenbrier Cos. seems to imply that he intends to pursue a merger between American Railcar (ARII), in which he controls a majority of the stock, and Greenbrier, two railcar builders with complimentary design portfolios and railroad business interests. The two companies each lack what the other possesses and the merger might be a good strategic move in an industry plagued by cyclical swings. However, Greenbrier’s manufacturing output has declined for the past two years and looks to fall again in 2008.

Wabtec scores second win in sales of its high tech brake technology

February 5, 2008

Analysis of:Wabtec Receives Order for ECP Equipment for Southern Company Coal Train | biz.yahoo.com

Southern Company, a southeastern utility which owns and leases a large fleet of railcars, gave Wabtec and order to equip 300 of them with electric brakes. The NS and BNSF railroads had been given approval to operate trains with electric brakes in 2007, after which NS ordered 210 electric brake systems for its coal cars from New York Air Brake Corporation. Around the same time NS had given Wabtec an order to develop a system to electronically manage its train operations.

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