Railroad Stocks

About Railroad Stocks

Railroads are close to unbeatable as businesses. Nobody is laying a competing transcontinental network, the route between two points is served by whoever's track reaches both ends, and moving heavy freight long distances by rail is simply cheaper than trucking it. That is a genuine, durable moat, and it is why these have been reliable long-run holdings despite growing slowly.

The number the whole industry is judged on is the operating ratio, operating expense as a share of revenue. Because the track is a vast fixed cost that has to be maintained regardless of traffic, efficiency is the main lever management controls, and decades of grinding that ratio down is where much of the shareholder return has come from. There is a limit to how much further it can go.

The exposure underneath is the economy, particularly the heavy end of it: coal, grain, chemicals, cars, containers from ports. Coal has been in structural decline for years and that headwind is permanent. Trucking competes on shorter routes, so lower diesel prices actually make life harder here. The equipment makers filed alongside sell into railroad capital budgets and are far more cyclical than the railroads themselves.

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