Greetings;
It’s hard to focus given the awful events in the Ukraine….
Also, I have hopefully recovered from a month-long IT issue that cost me a portion of my archives and most of my contacts - if you know of someone who is supposed to be on this list but isn't (or if this was forwarded to you and you should get it directly) please let me know - with apologies for any inconvenience.
To the trains - I am off tomorrow to the South Eastern Association of Railroad Shippers (SEARS) spring conference (Agenda and Bios – South East Association of Rail Shippers (searsconference.org)) then REF, but today’s task is a consideration of BNSF’s quarterly results which were issues (of course on a) Saturday. Some initial somewhat random thoughts:
- If Warren Buffett cares about his shareholders he may show it by performance but certainly not by transparency, analyst access, and timeliness (almost two months to compile and present the data, a full month plus after the other Class One railroads completed their earnings announcements)
- Warren the sunshine patriot? In his annual, much read and reported-on letter, Buffett called BNSF one of Berkshire Hathaway’s “Big Four” holdings, and “the number one artery of America’s commerce”, part of a package that the NY Times said “stresses BH’s citizenship and its role in the US economy, “the latest effort by Mr. Buffett to wrap himself and his $713B company in the flag”. He stressed the “bet on America” aspect when he purchased BNSF in 2009….
- Speaking of which, given the pushback, Buffett received at that announcement (“Has he lost his touch?” etc) would anyone expect this WSJ headline: “Railroads, Energy lift Berkshire”?
So how did BNSF do? Pretty well, following the group trend (the numbers in red represent a comparison, where we find apples/apples, to its big western rival, UNP). Revenues climbed 11% (12%) to $6.3B ($5.7B) on a 3% (4%) volume decline; net income increased 13% (as did UP’s EPS). The OR improved by 30bps to 60% (UP’s deteriorated by 230bps to a still best-in-the-west 57.4%). Both are planning to increase Capex, UP by 10% to $3.3B (a nice trend but remember inflation will account for maybe half of that?); BNSF by 20% to $3.55B (including $580mm for growth/efficiency projects such as some IM terminal projects and triple-tracking some of the Southern Transcon). By grouping:
- Consumer products revenues increased 7% on a 9% decline in units (the comparable numbers for UP’s “Premium Business” were +1%/-14% with yield up 17%). BNSF’s Business Unit is more than a third larger than UP’s. BNSF’s yield (ARC) was up 18% which leads to the following digression. First, yield does not equal price.
- That said, BNSF has long held that by virtue of their being, in essence, privately-held (as GWR is specifically), they were free from the quarterly pressures, not just on EPS performance but specifically on YOY price gains….they could use long term strategic thinking to show flexibility in pricing that, say, UNP could not, being “slaves to the market”. As an aside, it is this virtue of private (BH, or PE) ownership that should actually appeal to the STB though in fact, they have – rather naively - argued against “financial ownership”. That said, back to BNSF vs UNP:
- Given the fact that that it was thought the BNSF had price-flexibility, and the “brand name’ in intermodal – and UP’s ARC for Premium is 10% higher than BNSF’s Consumer (and this is apples to who-knows, given the mix impact of auto vs. intermodal within those respective Business Units) how is it that it was the UP that won two major IMC contracts (Schneider beginning last month and Knight-Swift beginning next January)? It isn’t near-term service levels, of course, that would change long-term associations, even though it flatters UP. Could it be price? UP’s CMO Kenny Rocker stated that they see some 10-15% upside on IM price – hardly sounding like a price-cut-for-volume trade - as contracts lag the big run-up in spot and truckload – which would still leave a value gap of up to 40% with the highway according to the JoC’s Index (which I am not fully sold on but here’s it’s supportive of my argument). We’ll have to see….if we can.
- One possibility….BNSF retains the big dog from the Ozarks, JBHunt, who said in a recent investor conference that the shift of those two carriers out of BNSF gives Hunt the “opportunity to fill that capacity”. Hunt also took the occasion to slam PSR for “eliminating services” as we recall that BNSF never took to that philosophy (or brand name).
- Industrial Products is another apple-ish comparable – and here UP is over 40% larger (and likely significantly more profitable given the Texas/petrochemical network). BNSF revenues were up 10% on a 6% volume increase and a 3% increase in yield (UP’s numbers were slightly better - +14%/8%/6%).
- Ag revenues were up 3% on a 2% volume decline. UP places Ag under its “Bulk” BU, which overall was a bright spot (volumes +5%, revenues +16%). But its Grain segment showed a 1% decline….
- BNSF’s Coal revenues were up 30% on a 9% increase in volumes (13%).
Things not discussed in the note (either Berkshire’s or @ www.bnsf.org ):
- Outlook, of course. Where – and when - does BNSF see the supply chain crisis resolution? Would they stand with NSC on the 2022 coal debate (the cat’s dead) or CSX (still bouncing!)?
- Service – and recently they have been suffering a bit as UP seems to be improving, with BNSF having roughly double the number of trains held for crew shortages of late. Both are running down ~5% on velocity, though BNSF’s dwell (2/12) was worse (up 7.2% vs +2.7%).
- The CPKC deal, even though we know that they have some interest in Mexico (??)
- Labor – but then no one else did, and they’re publicly traded! Also of great interest would be their opinion on the outcome of the west coast longshoremen (ILWU) contract, whose expiration date of July 31 has plenty of folks already suffering from supply chain shock nervous.
- The MRL deal was announced on January 10, whereby BNSF took back the lease after about 35 years (with 25 years left). Why did they do it? Control, capital expenditures to fuel BNSF growth, part of a (yes, Chuck) a trend of Class Ones adding lines in their general growth pivot (though some skeptics see it as a form of financial engineering, by capitalizing some expenses – but with only one shareholder to please, that sounds a tad spiteful).
- The STB, the hearings, and all of that….
- So the answers will have to come on the road – at NARS in May, at IANA in September.
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18