Rail Orders at 13-Year High Validate Buffett: Freight Markets

Rail-car orders rose to the highest level in more than 13 years, showing a strengthening economic recovery in the U.S. and confirming the “all-in wager” by Warren Buffett in buying Burlington Northern Santa Fe.

Orders surged more than sevenfold in the first quarter from a year earlier, with leasing company GATX Corp. (GMT) accounting for more than a third of the tally, according to data from the Railway Supply Institute. The total of 36,903 was the most since 1997 and the biggest quarter-to-quarter gain since 1993.

The demand is buoying shares of GATX and companies such as Trinity Industries Inc. (TRN) that build and lease cars as rail shipments rise. Private-equity firms also may enter the market, with General Electric Co. (GE) shopping its leasing business and Perella Weinberg Partners LP agreeing to buy a similar American International Group Inc. (AIG) unit in April.

“The industry is strong and is attracting investment dollars in both rail operations and rolling stock,” said Charles Clowdis, managing director of transportation advisory services at forecaster IHS Global Insight in Lexington, Massachusetts. “Investment in railroads and rail equipment as well is validated by the new rail-car orders.”

Leasing companies own about 55 percent of North America’s 1.6 million rail cars, which are used to haul everything from chemicals to farm goods to petroleum, according to Chicago-based GATX. They provide cars to railroads and industrial users, both of which also buy their own equipment.

Market Optimism

“We’re seeing fairly broad demand” for leased cars, GATX Chief Financial Officer Robert Lyons said in an interview. He said the first-quarter order is “a reflection of our optimism about our market.”

The cars from Dallas-based Trinity will be delivered through mid-2016, said Jennifer Van Aken, GATX’s investor relations chief. The utilization rate for its North American fleet rose to 97.8 percent at the end of the first quarter from 96 percent a year earlier. GATX owns 132,000 cars worldwide.

Orders are “something you don’t do in the initial stages of the recovery,” said Paul Bingham, economics practice leader at consultant Wilbur Smith Associates in Arlington, Virginia. Rail-car buyers “needed to have a recovery that worked through that backlog and strengthened enough that they believe it would continue to be the source of continued traffic.”

Rail-car deliveries from 2012 to 2015 will exceed the average of the 16-year period through 2010, according to industry forecaster FTR Associates in Nashville, Indiana.

Growth Indicator

That makes the orders an indicator of the economic growth that Buffett, 80, sought to tap when his Berkshire Hathaway Inc. (BRK/A) spent $26.5 billion in February 2010 to buy the 77.4 percent of Burlington Northern that he didn’t already own.

Buffett “stole that company. He paid a 31 percent premium for it. Our stock in that year was up 35 percent with no buyout premium,” CSX Corp. (CSX) Chief Executive Officer Michael Ward said in an interview last month. “He really knows railroads are going to play even a more important part of the future.”

U.S. rail volumes excluding grain and coal shipments rose 7.9 percent to 4.6 million carloads in the three months ended in March, according to data compiled by the Association of American Railroads in Washington. That was the second-highest increase in a first quarter, following last year’s 9.3 percent gain.

Commodity Confidence

Rail-car orders are “a sign that first of all, there’s confidence in the commodities that are hauled in rail cars,” Clowdis said.

Confidence was in short supply on Nov. 3, 2009, when Buffett agreed to buy Fort Worth, Texas-based Burlington Northern. Grain carloads were down 18 percent for the year as of that week, chemicals were off 13 percent, autos had fallen 39 percent and the U.S. was poised to log its 22nd straight month of job losses. Burlington was Buffett’s biggest deal.

“It’s an all-in wager on the economic future of the United States,” the chairman and CEO of Omaha, Nebraska-based Berkshire said at the time. “I love those bets.”

Since then, the Standard & Poor’s 500 Railroads Index surged 64 percent through yesterday, more than twice the S&P 500’s 26 percent advance. GATX rose 38 percent, and Trinity soared 77 percent. Greenbrier Cos., another maker and lessor of rail cars, more than doubled. CSX increased 67 percent.

Messages left for comment with Berkshire and Lake Oswego, Oregon-based Greenbrier weren’t returned. Nancy Farrar, an outside spokeswoman for Trinity, declined to comment.

‘Long-Term Value’

Perella Weinberg cited “long-term value in rail” last month when it bought the car-leasing unit of AIG, which has been shedding assets to raise cash and narrow its focus to insurance after receiving a $182.3 billion U.S. rescue.

GE is seeking bids for its rail-leasing unit after a failed 2008 sale effort, people with knowledge of the matter said this month. GATX, which was said to have discussed an offer almost three years ago, isn’t interested in buying the business “in total,” CFO Lyons said on May 19.

CIT Group Inc. (CIT), which also tried to sell its rail-car leasing business in 2008, reversed course and is expanding the division. The New York-based finance company ordered 3,500 rail cars in February.

CIT’s aircraft and rail-car leasing units are “very important contributors” to profit, CEO John Thain said.

‘Good Earnings’

“These are businesses that generate good earnings so unless you’re going to get a real good price,” retaining the business may be the best option, said Art Hatfield, a Memphis, Tennessee-based analyst with Morgan Keegan & Co. He recommends buying the shares of railroads such as CSX, Union Pacific Corp. (UNP) and Norfolk Southern Corp. (NSC), along with GATX and Greenbrier.

Burlington isn’t Buffett’s only stake in the industry. Marmon Holdings Inc., in which Berkshire bought a 60 percent interest in 2008, owns Union Tank Car Co., which according to Hatfield is among the largest rail-car lessors in the U.S. Berkshire said when buying Marmon that the rest would be purchased over a five- to six-year period.

“The transportation marketplace continues evolving in favor of rail,” Jason Seidl, a New York-based analyst with Dahlman Rose & Co., said in a note to clients this week.

Seidl cited world population growth and rising commodity demand, higher energy prices and global trade, along with “trucking industry challenges” such as fuel expense, emissions mandates and driver shortages.

Car orders signal the “faith that the railroad management has in their industry,” said Clowdis, the IHS Global Insight forecaster. “Probably one of the best investors in the industry bought Burlington Northern Santa Fe. There’s a lot of momentum with the rails right now.”

To contact the reporter on this story: Natalie Doss in New York at ndoss@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.