Thursday, December 30, 2004


Trucking stocks and rail stocks were good stocks to own this year. Not withstanding the fact that most had pretty big down moves during the spring and summer. Fortunately, we held on and even bought more of SCST. SCST in particular ran up too fast, gapped down and finished strong. CSX did alright and YELL went from 37 to 57. We added NSC to a few accounts late in the year and are up 4 to 6% on those. Why is transportation so strong? Will it continue to be strong?

The process of rationalizing the business took 30 years or more. Thirty years ago, railroad contracts were based on "the old days". Every train had to carry several employees and in many cases the employees were paid a full days pay for every 100 miles of travel. Now-a-days, trains leave the Florida farms in the evening and arrive in NY the next morning. Twelve days pay for a one night trip! NO! The rails knocked some heads and reached better labor contracts 30 years ago. Gradual attrition was used to lower the workforce until the late 90's and finally layoffs and spin-offs were used to down-size excess middle management.

In recent years, the rails divested short-lines, added equipment to improve turn times and added enhanced data and communication technologies. Shipments now transfer from ships to rail to trucks efficiently. The combined effect of all the above means operating ratios are the best in centuries.

The increased demand for coal and other bulk commodities has also been a significant benefit to the rails. NSC for example is hauling long coal trains at peak operating rates. Rail capacity has been pushed to the point that truckers have been able to pick up business based on better service not better price.

Ironically, as the baby boomers retire, it is the shortage of labor that is helping the industry the most. If you want to earn a good living, sign on as an engineer trainee. If you are willing to be away from home nights and weekends, you can earn $110,000 per year "sitting in a rocking chair". The key fact is that trucks and trains need to run at full loads because they can't find another driver to make another run. The $110,000 wage is extremely small when compared to the total revenue generated.

Often times we forget how simple business is. When your business is running at peak capacity at high margins, you make a lot of money. Because the stock market looks ahead at least 6 months, the stock prices are currently discounting the good profits projected for next year. However, when an industry is in such a sweet spot, it often takes a long time for competition to materialize and high margins can last for several years. In the case of hauling coal, we are talking about a very long process. In many cases, there will never be another competitor hauling coal from certain mines to certain power plants. The competition must eventually come from a cheaper electricity produced at another power plant! World wide demand for energy is growing quickly. Hauling coal will be a strong businesses until major new sources of energy are developed.

The bottom line is that it took years to get to this very profitable scenario and it will take at least until the next big recession to slow the profit down. For the next several years, TRUCKING WILL KEEP ON TRUCKING!