Tuesday, September 28, 2010

From the Editor: Why investors like railroads: It’s all about ROI (September 2010)

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By William C. Vantuono, Editor

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Recovering from the worst business downturn in nearly 80 years, U.S. Class I railroads earned an average rate of return on net investment of 9.60% in the 12 months ended June 30, 2010, compared with a year-ago ROI of 9.47%.

The nation’s two largest railroads had returns in the low double-digits. BNSF Railway earned 10.25% vs.10.20% a year ago, closely followed by Union Pacific, with a return of 10.02% compared with 9.15% in the prior 12-month period.

Canadian Pacific subsidiary Soo Line, smallest of the Class I railroads, was statistically the best performer in the 12 months ended with this year’s second quarter. Soo Line ROI was 16.30%, up from 11.06% a year ago.

Norfolk Southern earned an ROI of 9.44% in the latest 12-month period vs. 10.89% a year ago; CSX earned 8.54% vs. 8.59%; Kansas City Southern earned 8.43% vs. 6.79%; and CN subsidiary Grand Trunk Corp., 7.84% vs. 7.39%.

“Whether any of these ROIs meet the Surface Transportation Board’s revenue adequacy standard is not now clear,” says Luther S. Miller, our Senior Editorial Consultant. “In the view of the STB, which uses the information in rate cases and other proceedings, a railroad is revenue adequate if it earns the current cost of capital.”

The latest cost of capital determination by the STB was 11.5% for the year ended Dec. 31, 2009.

Take a look at the STB chart below. I think you would be hard-pressed to find another industry that has posted numbers as strong as these in difficult economic times.

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William Vantuono

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.