Mr. Toby Kolstad

GLG News by Mr. Toby Kolstad, President

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The fourth quarter orders for new railcars were inflated to make a bad situation look good.

January 30, 2008

Analysis of:Rail-car orders up in fourth quarter, but expect decline in '08, EPA says | www.progressiverailroading.com

Last week the ARCI released the railcar industries results for the fourth quarter of 2007, including 23,722 new orders, 14,862 deliveries, and a backlog of 75, 860 cars. Normally, those types of numbers would signal a rising production schedule in the year ahead. Instead, total deliveries in 2008 are expected to fall from the 63,156 delivered in 2007 to around 48,000 in 2008.  The reason for the discrepancy is the number of orders that have been reported for cars that will be built after 2008

Railroad’s pricing power continues to offset traffic loses

January 24, 2008

Analysis of:Railroads Report Strong Q4 | biz.yahoo.com

Both Norfolk Southern (NSC) and CSX Transportation (CSX) posted strong earnings for the fourth quarter and the year in spite of traffic losses. Costs were tightly controlled on both systems and were reduced in proportion to the contractions in traffic, allowing all of the freight rate increases to be reflected in the bottom lines. CSX had the most aggressive rate increases and indicated that they would take similar pricing actions in 2008, preferring margin gains over traffic increases. Both companies have promised and delivered rate increases for three straight years. Although those who have doubted that rates could go much higher have been proven wrong in each of the two previous years, once again it must be asked if these increases be sustained indefinitely

Greenbrier needs a better second half to match their regular earnings in 2007

January 15, 2008

Analysis of:UPDATE 2-Greenbrier Q1 earnings trail Street, shares fall | www.reuters.com

Greenbrier’s reported earnings that were only one third of what had been expected, and even before the special charges due to more plant closing costs and currency losses, the earnings would have been 30% lower than had been recently estimated for the company.  Greenbrier tried to put a positive spin on the performance by comparing it to their first quarter of 2007 when they earned $0.12 vs. the $0.16 this year. The comparison was partially appropriate; in a weak new railcar market, the winter months are much worse for Greenbrier than other companies because buyers of intermodal equipment usually prefer to take delivery of their new cars in the second and third calendar quarters. During last year however, Greenbrier had other problems besides a weak market that hurt earnings during their first quarter.

Railcar builders are in two camps, those in for a rough year, and those holding their own.

January 7, 2008

Analysis of:Rail Stocks Are Still off the Track | www.thestreet.com

It is difficult to argue with Chris Versace’s facts regarding the past performance of the railcar builders and the railcar industry in general. This is a cyclical industry and the past is often prelude to the future. However, his broad assertions that roughly apply to the industry as a whole and perhaps to general trends at each company overstate the “problems” for some companies, painting some good companies with the red ink that might only apply to a few. The key to separating out the winners and losers is to know what types of cars each builder profitably produces and what cars are going to be built.

Union Tank Car will probably remain independent

December 27, 2007

Analysis of:Berkshire Hathaway to Buy $4.5 Bln Marmon Stake | uk.reuters.com

Berkshire Hathaway announced that it had agreed to purchase Marmon Holdings, Inc. from the Pritzker family. Union Tank Car Company, the oldest railcar lessor and tank car builder in the nation, is owed by Marmon and has been the subject of rumors during the past year regarding a possible sale of the company. Until the purchase by Warren Buffet’s company was announced, the divestiture by Marmon of some or all of its holdings was a distinct possibility. It now appears as though Union Tank Car is no longer for sale.

Freightcar America seems to be grooming itself for a sale

December 20, 2007

Analysis of:FreightCar to Close Pa. Plant | biz.yahoo.com

Freightcar America announced that they were closing the production facility in Johnstown PA after failing to reach an agreement with the unions at the facility to restructure their agreement. The company said that the costs would amount to $34.3 million and would be subtracted from the fourth quarter results. Orders are down and production in 2008 looks likely to be less than deliveries in 2007, so the company should have no problem meeting all their current commitments with deliveries from their other plants. If the estimated costs of closing this facility are correct, then this company looks very attractive as a takeover target in 2008.  

Railroads will fare better than most companies, and very much better than trucks in 2008.

December 14, 2007

Analysis of:Railroads will fare better than trucks next year in a continuing soft economy, Fitch Ratings says | www.progressiverailroading.com

A Fitch Ratings report has predicted that railroads, although likely to face weak traffic demand in 2008, will fare better than trucks because grain and coal volumes should increase over the rails and the vaunted “pricing power” of the railroad companies will remain in force. So what else is new, and why go to the trouble of stating the obvious? Railroad earnings next year are almost sure to increase over 2007 levels since volumes will climb and rates will increase. Most other industries should be so lucky in what appears to be setting up as a “down” year.

Railroad tank car production to decline in 2008 at Union Tank

December 6, 2007

Analysis of:Union Tank Car plans layoffs | www.post-trib.com

Union Tank Car announced that it is reducing its production rate at two of its three manufacturing plants effective immediately. Moreover, it is possible that production will also be reduced at the Alexandria LA. The company has indicated that demand has been falling and that the production, which had been increased to accommodate the surge in orders for ethanol cars, will now be reduced to normal levels. The question which should be asked is what happened to the 33,000 backlogged orders at the end of September?

Another wave of railroad mergers is not going happen, anytime!

November 30, 2007

Analysis of:U.S. Railroads Face Pressure to Merge, CN Chief Says (Update2) | www.bloomberg.com

Hunter Harrison predicted that there will be investor pressure on the major railroads in the US to merger and that a large transaction will occur within the next five to six years. Hedging his bets just a little, he further said that these developments would not involve the CN, at least not until 2009 when he will retire. Big news! It will take at least until 2009 to get the CN/EJE merger approved by the Surface Transportation Board. The STB signaled that it disapproved of large mergers such as the CN and BNSF proposed a few years ago, and there has been not sign that they have changed their mind. There would be great opposition from many parties to any further consolidation in the railroad industry.

Railroad tonnage and carload gains should put railroads on the road to recovery in 2008

November 26, 2007

Analysis of:Rail Traffic Up in Week Ending Nov. 10 | www.aar.org

The American Association of Railroads (AAR) reported that US carload traffic during the week of Nov. 15 was 5.1% higher than the similar week in 2006 and that intermodal traffic was only down 0.8% . Carload traffic began to improve at the start of the fourth quarter, but this was the first time since midsummer that intermodal traffic looked anything like last year. However, not all of the railroads are enjoying the traffic gains; most carriers are still handling less traffic than last year. The Union Pacific seems to be the only railroad reporting significant traffic gains over 2006. (Both Canadian railroads are reporting more traffic this year than last during the fourth quarter.)

CP is improving its operating ratio the old fashioned way; increasing business and lowering costs.

November 16, 2007

Analysis of:Canadian Pacific building momentum for 2008 | biz.yahoo.com

CP Rail recently announced that their third quarter operating income had increased over 7% compared to the same period in 2006 and that its operating ration had improved from 74% to 73%. Although most of the other major, Class I railroads in North America had reported similar results for the 3rdquarter, CPR stands out for the way they achieved the same result. Unlike the other railroads, including the Canadian National Railroad (CN), CPR had strong traffic gains in all sectors. Moreover, while all of the other carriers reported significant freight rate increases, CPR’s revenue per carload in the third quarter of 2007 were very similar to the numbers reported during 2006.

Counter cyclical earning potential for WABTEC

November 7, 2007

Analysis of:Wabtec Railway Electronics to develop vital PTC pilot for NS | www.progressiverailroading.com

Wabtec announced that they had been awarded a contract by Norfolk Southern (NS) to develop a positive train control (PTC) system. PTC is the first change in the basic method of controlling train operations since the current system was first established in the late 1880s. Previously, the BNSF had awarded a contract to Wabtec to install an Electronic Train Management System (ETMS) on its lines after the Surface Transportation Board (STB) had approved of a system that Wabtec had developed and tested for NS and BNSF. Wabtec is also working with Union Pacific (UP) on a similar EMTS project that has not yet been given installation approval by the STB.

Trends give a brighter picture then the current railroad traffic numbers

October 25, 2007

Analysis of:Rail Traffic Off in Most Recent Week | www.aar.org

For 41 weeks, the AAR has reported that the weekly railroad carload totals were less than they were in the same week one year ago, and for most of that time, that railroad ton miles were less than the same week in 2006. The story actually began on January 12thof this year when the weekly totals turned south after heading higher for almost every week in 2006. It didn’t make sense in view of the growth being reported for the GDP, especially for the 3.8% jump recorded for the second quarter. Numerous studies, over many different time periods, for many different modes of transportation, and in many different countries have shown an almost identical relationship between GDP and ton mile growth (or contraction). So why are truck companies, railroads, and barge lines all reporting less ton miles in 2007?

Downturn of railcar cycle confirmed by latest quarterly ARCI report

October 18, 2007

Analysis of:Rail-car backlog, orders and deliveries nosedive in third quarter, ARCI data shows | www.progressiverailroading.com

The railcar builders association, the ARCI, reported that in the third quarter, only 8,121 new railcars were ordered, bringing the total orders for the year to roughly 31,000 cars. Moreover, deliveries decreased to 15,032, bringing the year to date total to 48,296. At Rail Theory Forecasts, we had predicted last fall that the total deliveries for 2007 would only reach 61,500 cars, compared to the 74,000 units delivered in 2006. Our preliminary forecast for 2008 in much lower, and the third quarter data appears to support out early prediction.

Don’t anticipate greater profits soon from Greenbrier’s venture into tank car manufacturing

October 15, 2007

Analysis of:Greenbrier to build 11,900 cars for GE, enter North American tank-car manufacturing market | www.progressiverailroading.com

Greenbrier’s surprise announcement that it will build new tank cars in the future for GE Rail Services was a bold and badly needed development for that railcar builder, but don’t anticipate much profit growth in the near future from this new venture. Demand for Greenbrier’s main car types, double-stack intermodal cars, lumber flatcars, and general purpose boxcars are still falling and Greenbrier’s railcar deliveries in 2008 should fall below their depressed count for 2007. Moreover, Freightcar America (RAIL) and American Railcar (ARII) are both testing new intermodal cars which will claim some of the market share from Greenbrier when demand for that car type recovers.

Railroad carload traffic is showing signs of improvement

October 1, 2007

Analysis of:Rail Traffic Up in Most Recent Week | www.progressiverailroading.com

For most of this year, the week to week comparisons of carload and intermodal traffic in 2006 have been negative; but for the week ending September 27, 2007, the number of carloads reported was slightly higher than those reported for the same period in 2006. While the weekly comparisons have varied widely during the past year, ranging from -8% to +2%, with the overall average to date equaling -3.3%, the trend since Mid-April of this year has be up. Although there will be negative comparisons to last year in the weeks ahead, it appears as though there will probably be more weeks of growth (only 3 so far in 2007, including the last).

Railroad Pricing Power is starting to be tested in Congress

September 24, 2007

Analysis of:Senate Judiciary Committee passes rail ‘antitrust enforcement’ bill | www.progressiverailroading.com

A Senate bill involving railroad regulatory matters, S.772 introduced on March 6, 2007, was recently approved by the Judiciary Committee and sent to the full Senate for consideration. Ostensibly, the bill would give other government agencies some regulatory control over railroad mergers, which would short circuit the lasses faire approach of the Surface Transportation Board (STB) since it evolved from the former Interstate Commerce Commission (ICC). If this is all the bill contained, it would probably benefit railroad stock holders by handcuffing management on future mergers; but there are other provisions regarding freight rates which are really the reason d’etre for the legislation.

CN’s new Prince Rupert business will be too small to measure for a long while.

September 14, 2007

Analysis of:Container Port Opening Big Boon for CN Rail | biz.yahoo.com

The new intermodal terminal on Canada’s West Coast will begin operation this fall, and CN hopes that traffic will be diverted from other West Coast ports to its less congested facility and rail lines. It sounds good in theory, but there are several other West Coast ports with good highway and rail connections that are trying to break the lock that the Los Angeles/Long Beach terminals seem to have on West Coast imports. Unlike the other ports, Prince Rupert has little to offer but another way to get to the US Midwest.

DM&E was a good buy for CP Rail, although a bit pricy.

September 7, 2007

Analysis of:CPR, DM&E reach $1.5 billion merger agreement | www.progressiverailroading.com

CP Rail announced that they will purchase the DM&E railroad for $1.5 billion, plus an additional $1.0 billion in the future if an extension is completed into the Powder River Basin coal area by 2025. The DM&E is a conglomerate of a number of bankrupt and abandoned rail lines that was assembled during the past 20 years into the largest regional railroad in the US. Although it has gained fame for its attempts to extend its lines into the western coal fields of the PRB, it owes it current prosperity to the ethanol industry. This traffic, plus a connection to a former rail partner may be the reason for CPR’s purchase, more than the possible coal traffic that the PRB might offer.

BNSF railroad franchise has few faults and all the right markets

August 30, 2007

Analysis of:Railroads and Trucks: Together for the Long Haul | biz.yahoo.com

BNSF recently thanked the trucking companies and their drivers for diverting trailer and container traffic from their highway corridors across the West to BNSF rail lines. This partnership between BNSF and the trucking industry began in 1989 with an agreement between J. B. Hunt, a Midwest Trucking company, and BNSF, a large Western railroad. At first it seemed more like a marriage of convenience for the two competitors than a true joint venture, but driver shortages and a boom in West Coast imports have allowed both companies to profit from the combination. This however, is just one of the success stories at BNSF, which is why Warren Buffet finds this company so attractive.

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