With Railway Age since 1992, Bill Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age's leadership position in industry affairs with the conferences he conducts on operating passenger trains on freight railroads and communications-based train control.
DAYTONA BEACH, FLA.: The 54th running of the Daytona 500 is scheduled to take place tonight (Monday Feb. 27), after heavy rains forced postponement of The Great American Race from yesterday.
Kansas City Southern Railway Company (KCSR) has taken out a $54.6 million Federal Railroad Administration-administered Railroad Rehabilitation and Improvement Financing (RRIF) Program loan to purchase 30 new General Electric ES44AC diesel-electric locomotives.
Last weekend was the start of Speed Week, which hopefully culminates on Monday night , Feb. 27, with the rain-postponed running of The Great American Race, the Daytona 500.
By Tony Kruglinski, Financial Editor
If you are like this writer, during the past weeks and months you have been pummeled by kith and kin concerning Warren Buffett’s BNSF strategy and what it may mean “for” and “to” you. It’s pretty clear that we are getting these questions because our friends and family don’t understand exactly how we make a living in this industry and now (they think) they have something to discuss with us! God bless them. But I would suggest that we need to go beyond the easy “Buffett” answers that we give friends and relatives . . .
“It’s a vote of confidence for the American economy and an important industry that supports it.”
“He recognizes the long term role railroads play and the long term growth that is possible for the knowledgeable investor.”
. . . and ask some serious questions that need asking, which have nothing to do with Mr. Buffett’s investing wisdom.
We should ask, for instance, how Warren Buffett’s very public endorsement of the future of the railroad industry in North America will, in-and-of-itself, affect us? Let’s start with some basics:
• Savvy industry participants know all about the vibrant future freight railroading will have when the economy rebounds.
• Investors in railroad stocks are now benefiting from the “rising tides lift all boats” result of Warren Buffett’s BNSF strategy.
• Railroad industry wannabe investors have been sitting on the sidelines looking for opportunities to jump into a depressed market for rail equipment (in particular), but have found their options severely limited due to the absence of sellers willing to take a haircut on prices.
Will the spotlight Mr. Buffett has put on our industry suggest to potential investors (who have been on the sidelines, studying the industry for months or years) that waiting for better opportunities may just cause them to miss the proverbial train? We think that’s a good possibility. Everything in life needs to be taken in context with what’s happening and what can be perceived as likely to happen.
For instance, in the second half of 2008, several large railcar operating lease portfolios were (formally and informally) offered for sale. We are told that none sold because potential buyers were unwilling to offer pricing at or close to the sellers’ book values. The only sale that occurred was a small 3,000-plus fleet that sold (for a discount of about 25%) when its parent entered liquidation.
Every indication is that one or more operating lease fleets could be on the market in 2010 if the interest and pricing rebounds in the marketplace. Both CIT and AIG are possible candidates for sale. There could be others. If buyers continue to hold back, waiting for a “deal” on discounted assets, these potential sales will only occur if the seller hits a wall of some sort and absolutely has to sell.
But what if, keying on Mr. Buffet’s view of the long-term investment value represented by the railroad industry, some of these buyers decide that the time to invest is now before the train leaves the station? We think that possibility is a real one. Residential real estate sellers and buyers ultimately reach agreement based on mutual perceptions as to the state of a moving market. We believe it is very possible that efforts to market existing operating lease portfolios of equipment in 2010 may be more successful than in the past simply because Warren Buffett has started playing face-up poker regarding his long-term view of our industry. (A side issue: Debt markets need to rebound to lend into these potential acquisitions.)
Now, who will these likely buyers be? We think that many of the new investors that took a look—and a pass— at buying operating leasing fleets will be back and, perhaps, may be more willing to realistically consider the seller’s minimums. Remember, investors who invested side-by-side with Mr. Buffett in BNSF are now due to earn a premium materially larger than any discount sought by potential lease fleet investors in 2008!
Timing is everything.
What about the stocks of railcar builders that have been depressed due to the miserable market for new car sales? Here, we are not sure that any Buffett vote of confidence will be able to boost stock prices unless and until order books begin filling up. Unfortunately, hundreds of thousands of parked freight cars would suggest that is not about to happen.
How about investments in other rail industry suppliers? We believe that there will be increased investor interest due not only to Mr. Buffett, but also to passenger rail funding coming from Washington. (Arguably, federal largesse has already started M&A activity in this sector.)
I’ll steal a page from Marilyn Monroe’s serenade to JFK on his 45th Birthday (Sung to “Thanks For The Memory”):
“Thanks, Mr. Buffett.
For all the things you’ve done.
You’ve invested by the ton.
You’ve led the way.
You’ve sold the Street
To us you’re number one.
We thank you so much!”
By Tony Kruglinski, Financial Editor
In this industry you become famous—or infamous—as a result of the way you conduct yourself in business. Railroaders have long memories for those who have helped and hurt them in business dealings over the years. On Sept. 6, Lawrence Beal, one of the most memorable rail professionals in North America and President of National Railway Equipment Company, passed away after a short illness.He will be remembered by thousands of rail professionals—the way Jimmy Dean put it in that song about “Big John,” as a big, big man in our industry.The funny thing is, he could have been remembered quite differently. You see, Lawrence spent a lifetime in the rough and tumble business of buying and selling used locomotives and their components. And that is a career rife with opportunities to teach the guy on the other side of your deal the real meaning of caveat emptor!But that’s not the way Lawrence did business. Lawrence built a career on customer service and satisfaction. That’s not to say that he didn’t make money. He did. It’s just that he never made it by doing a hatchet job on the people with whom he was dealing.When asked a direct question, Lawrence always told the truth. And when he gave his word on something, if a problem developed, as can occur with used locomotives and used components, he stood behind that word and made things right. As a result, Lawrence Beal had more friends in the rail industry than anyone else I know.I first met Lawrence when he was running Chrome Crankshaft in the 1980s. A few years later, when I was financing the Wisconsin Central, Lawrence and NREC were in the process of selling some rehabilitated SD45 locomotives to this new regional railroad. The problem was that the WC had been delayed in starting business by regulatory issues and was about to lose the 45s because they had no money, pending the closing of my financing upon the start of operations, to pay for them. Lawrence arranged a quick short-term lease to a Class I to bridge the time gap and as a result the WC had locomotives to start business when they received the go-ahead to begin operations.There are literally hundreds of stories like that about Lawrence in the North American railroad industry. If you have known him and worked with him, you probably have your own.Readers who have attended one or more of Railroad Financial’s Rail Equipment Finance Conferences will remember Lawrence as the folksy fellow with the “down home” southern Illinois accent who, whenever he was asked the value of a particular type of used locomotive, always responded by smiling and asking: “Am I buyin’ or am I sellin’?”He was a beautiful man. He was also an innovator. Lawrence led the industry in building “new” locomotives out of existing locomotive components. I don’t have any stats, but I believe NREC has built and delivered more genset locomotives to the industry than any other builder. When he wasn’t happy with what was available in the marketplace—for instance, train control computer hardware and software—he developed his own product.There is a saying that the guy that dies with the most “stuff” is the winner. Well, if you measure Lawrence Beal’s achievements by the amount of non-railroad North American locomotive and locomotive component rebuilding capacity he controlled upon his death, he was certainly the winner. In fact, I don’t think anyone else in the industry even comes close.For those of you who did not have the benefit of knowing Lawrence Beal and of doing business with him, let me tell you what he taught me: There is always a way to make something that appears impossible, work. You might have to take the transaction’s structure apart and reassemble it countless times, but unless someone or something is completely off the wall commercially, there is always a way to close a deal that appears impossible. It just takes some hard thinking, and, perhaps, some compromising, to get it done. Finally, you can wring every nickel of profit out of a deal and still do it honestly and ethically.If you think and plan ahead, as Lawrence did regularly, investing in used locomotives when the market for them was a horror story, you can ride the markets up and down to a significant gain. You just need to have steel in your backbone and an unwavering confidence in your own view of the marketplace—something Lawrence had in spades.Lawrence, we are going to miss you. We know your son Steven and his team at NREC and its affiliates will continue to do business in the way you taught them and that everyone you touched professionally recognizes that they are better off for having known you. I know I certainly am.