Friday, June 19, 2009

Jason Seidl: Why railroads are “an easy target”

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Dahlman Rose & Co., LLC Director Equity Research and Railway Age Contributing Editor Jason H. Seidl recently discussed the railroad sector with The Wall Street Transcript (TWST), a service for investors and industry researchers that provides commentary and insight through interviews with CEOs and research analysts. Following are excerpts from its 18-page Engineering & Construction Report:

jason-seidl-web.jpgTWST: How has the rail group done so far this year?
Seidl: The rail stocks have recovered off their lows of 2009, but they're still not back to the levels seen in 2008. I think there are a couple of reasons for that. The group is more of an early cycle play and investors have rushed to move money into sectors that historically have been leading indicators for a recovery. The fact that they have not moved as much as their trucking counterparts is likely due to their exposure to different end markets and pending regulation coming from Capitol Hill.

TWST: What's the pressure in terms of possible new regulation?
Seidl: There are several bills out there on Capitol Hill that are looking to exert more regulatory control of the rail industry, whether you're looking at it from an antitrust standpoint or you’re looking at it from a captive shipper standpoint.

TWST: Why pick on the rails? Why are they a target?
Seidl: I think the rails have been the favorite target of some due to the structure of the industry. When you look at the rail industry and how it’s structured, on your best day you’re going to be a monopoly and on your worst day you’re a duopoly. Hence, it can be an easy industry to pick on. Unfortunately for the rail industry, you still don’t have a lot of railroads earning acceptable returns, even given the tightly controlled state of the market. According to a recent proprietary survey that we completed, the majority of railroad shippers oppose industry regulation. However, a very vocal smaller minority has made enough noise over the past few years to get the attention of a few people on Capitol Hill. One of the people on Capitol Hill was Sen. Rockefeller, and he recently has become Chairman of the Committee on Commerce, Science and Transportation. With Rockefeller in the important chairman role, he has a much better chance of getting a bill to the floor that has good support. I believe this is what's putting some pressure on the group.It is also important to mention that the other pressure on the group is the economy.