Legacy company keeps chugging along. 🛤️ Tesla’s announcement of their 30 November Cybertruck delivery date may have been the talk of the X Town Square last week amid the EV giant’s third-quarter (Q3) earnings - where Tesla (TSLA) missed both earnings and revenue estimates for the first time since Q2 July 2019. But hidden within investing news feeds was a different giant’s earnings results: freight train behemoth Union Pacific (UNP).

The world’s largest railway operating company by market cap, Union Pacific, last week beat Q3 earnings estimates but just missed revenue forecasts. Their earnings per share (EPS) was US$2.51, down from last year’s third-quarter of US$3.05, but ahead of analyst expectations, which were around US$2.41. Union Pacific CEO Jim Vena described the company as feeling the pinch from higher inflation and labour costs paired with slowing consumer demand that resulted in fewer carloads. He sums up in his letter to employees saying:

‘Things cost more to make and to move, and people are buying less of them.’

Following the railway company’s results, Union Pacific’s stock climbed 6.3%, since dropping back to around their pre-earnings value. 

Freight trains were once the engine room for the emerging US economy. 💵 Railways then and now connected the vast mountainous, wooded and desert lands across the US and Canada with goods transported to and from warehouses, towns, cities and ports through temperature extremes. Side-by-side KiwiRail, which moves around 19 million tonnes of freight annually, Union Pacific’s numbers are staggering. As are their investments to future-proof a network and infrastructure that faces increasing sustainability, global supply chain and climate challenges, which in the decade between 2013 to 2022 tallied US$34 billion. So how does Union Pacific stack up against other US railroad freight industry heavyweights?

• Union Pacific (UNP) has a market cap of US$125.27 billion and their stock is up 3.6% since October last year sitting at US$205.71, while their stock is down nearly -3% year-to-date (YTD). They have a dividend yield of 2.5% (between 2% and 6% is considered to be a ‘good’ dividend yield), which is the percentage of the stock price paid out to investors as dividends, aka income, or return on investment. Union Pacific listed on the NYSE for US$4.17 in January 1985. Early investors who invested US$10,000 would have amassed US$250,923.94 today with an average annual rate of return of 14.39%, not including dividends, which is higher than the S&P 500 average of 10% average annual historical return.
• CSX (CSX) is the fourth-largest railway corporation in the world and holds a current market cap of US$58.879 billion with shares valued at US$29.81. The company also reported Q3 earnings last week with an 8.3% revenue decline, but beating Zacks estimates by 0.25%. In the year since October 2022, their stock has climbed 2%, but has fallen nearly double that 7.4% YTD with a company dividend yield of just 1.46%, below what is considered ‘good’. Initial investors buying US$10,000 worth of shares on the NYSE in November 1984 would have US$205,142.16 today, discounting dividend payouts, marking an average annual rate of return of 13.44%, again, higher than the S&P 500 market average.
• Norfolk Southern (NSC), coming in fifth globally with a market cap of US$44.402 billion, has fallen 14% since October 2023 to US$196.38 - after peaking on 2 January this year at US$255.79, with a smaller peak of US$236.66 this July. But their stock has plummeted 23% YTD, with a dividend yield of 2.74%. Norfolk Southern’s Q3 earnings call is this week with Zacks estimating a 11.98% revenue decline year-over-year (YOY). The company’s nearly two-hundred year history culminated in publicly listing on the NYSE in December 1984. First investors investing US$10,000 buying shares at US$7.25 would have grown their initial investment to US$134,790 today with an average annual rate of return of 11.47%, excluding dividends, also a slightly higher rate of return than the S&P 500 10% historical average.

But wait, there’s more… There’s another railway behemoth on the other side of the tracks - the largest freight railway in the US, BNSF Railway. 🛤️

Why Buffett bet Berkshire on a railway

Railways are considered by some to be cash cow companies. 🐮 Famously, Warren Buffett buys companies with ‘healthy’ profit margins that have outmanoeuvred their competitors over time - not buying a company’s stock simply because it’s priced low. Which explains why in early 2010, in a deal valued at around US$44 billion, Warren Buffett’s company Berkshire Hathaway (BRK.A, BRK.B) acquired the remaining 77.4% share (that the company didn’t already own) of North American railroad company BNSF Railway. 

Buffett was focussed long-term. Telling Berkshire Hathaway investors in 2011 that freight trains are ‘three times more fuel-efficient than trucking is’. Today, BNSF’s scale speaks for itself,  moving ‘enough grain to supply 730 million people with a year’s supply of bread’.

In Berkshire Hathaway’s August Q2 report, where the company reported a 7% increase in operating earnings, BNSF freight rail transportation revenues decreased 12% from Q2 2022, and also saw a nearly 6% revenue decline in the first six months of 2023 as compared to 2022.

Labour lobbying for workers’ rights 🪧

After decades of asking, railway workers get paid sick leave. 🚂 While this weekend Kiwis celebrated New Zealand Labour Day, which became an official holiday in 1900 in recognition of our right for a 40-hour working week, some workers’ rights in North America haven’t been quite so straightforward. 

The Wall Street Journal’s ‘The Journal’ podcast called 2023 The Year of the Strike, highlighting the tsunami of US workers walking off the job this year - from Hollywood writers and actors to the recent costly US auto workers strikes. The railway sector’s 93,000 workers, however, who were on the brink of strike action late last year were blocked when Biden and Congress stepped in passing legislation to avoid bringing the US economy to its knees if the critical sector stopped work. 

Biden’s administration however lobbied rail companies - which faced the court of public opinion - to work with the 12 unions that represent railway workers to agree paid sick leave deals, with CSX the first to act in March this year, followed by Union Pacific, Norfolk Southern and BNSF. This was one among a raft of other demands, including fixing wages underpayment. 

As oil demands are expected to peak in 2030, only time will tell whether Buffett’s bet on railways as the more efficient mode of transporting freight was the right one. 🎲

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