More Trouble on the Tracks
The fraying soul of America... More trouble on the tracks... Crisis in Ohio... What Norfolk Southern employees are saying... Nothing changed... Two big takeaways... Before you go betting against a stock...
Today, we're taking another look at the fraying soul of America...
You may recall our reporting last year on the problems with the American railroad industry, a foundational part of the country... I (Corey McLaughlin) talked several times about the "trouble on the tracks," and many of you shared your experiences with the strained U.S. freight-railroad system.
It all stemmed from major American railroader Union Pacific (UNP) telling certain customers – American businesses in essential industries – early last year that, already amid inflation and supply-chain crises, they needed to reduce shipments by nearly 20%.
The company said this would help it deal with congested rail lines... Union Pacific blamed labor issues and what it called "locomotive shortages," the latter of which we largely debunked as a myth. The true story was simpler...
The railroad industry just couldn't keep up with demand...
Following years of malinvestment and cost-cutting in the name of "efficiency," major railroads couldn't keep up with a surge in demand amid the artificially stimulated pandemic recovery.
The railroads said they didn't have enough workers. Critics pointed to the companies' Precision Scheduled Railroading ("PSR") practices instead, as we wrote in the May 11, 2022 Digest...
The merits of PSR – which is essentially a concept designed to boost railroads' "operating ratios," i.e., better efficiency with fewer costs, and largely implemented industry-wide in 2017 – should be a central part of this story moving ahead.
The idea behind the system is to basically run freight trains on a fixed schedule... to maximize profits, and run longer trains in many cases, as in miles-long, congesting popular lines while there's less traffic on routes that don't do enough business to turn a profit.
It also means fewer workers – about 45,000, or 29% of the industry's workforce, has been slashed the past six years and most moves happened before the pandemic, according to Greg Regan, a labor union president representing rail workers.
I also remember one of our readers, a fourth-generation railroader, writing in to say: "I have seen a lot in 30 years" in the industry, and "this is the worst it has been and we are far from bottoming out."
With the chemical disaster unfolding in Ohio right now stemming from a Norfolk Southern (NSC) derailment – and a separate accident with another Norfolk train today – these issues are back in the news. And, unfortunately, it sounds like nothing much has changed since we last talked about the railroads...
The trains are too long...
Last year, the tensions in the railroad industry escalated in salty public hearings. These included claims that railroads were mostly at fault, reflected by the fact that the miles-long trains are clogging up the tracks, all in the name of efficiency that was anything but...
Color me disappointed, but not surprised, that this same behavior is now being cited as a reason for the freight-train derailment in Ohio... (The other derailment today near Detroit is breaking as we go to press, so we don't have as much information.)
According to Norfolk Southern employees who spoke with CBS News, the train that derailed in East Palestine, Ohio on February 3 had broken down two days earlier. What's more...
The employees say there were concerns among those working on the train over what they believed was the train's excessive length and weight — 151 cars, 9,300 feet long, 18,000 tons — before it reached East Palestine, which contributed to both the initial breakdown and the derailment.
In the two weeks since, many residents who were home at the time of the derailment, or who returned after authorities conducted a "toxic release" of the hazardous chemicals on board, have told CBS News they are suffering from headaches, rashes, respiratory problems and painful coughing.
"We shouldn't be running trains that are 150 car lengths long," one of the employees said. "There should be some limitations to the weight and the length of the trains. In this case, had the train not been 18,000 tons, it's very likely the effects of the derailment would have been mitigated."
Of those 151 train cars, 50 cars derailed... at least 10 of which were carrying hazardous materials. Maybe there's some other track or technology issue at fault, too – we'll find out – but I'll go with what the workers are saying for right now.
We'll continue to keep tabs on this story about American railroads, and like last year, welcome your feedback on it at feedback@stansberryresearch.com. The more we hear and see, the more I want to write a book and dive deep into the industry.
In the meantime, though, a few first-impression takeaways...
First, what the heck has the Surface Transportation Board ("STB") been doing? More government oversight that is more like a waste, it sounds like...
The STB is the same agency that called executives from the major American railroad companies – including Norfolk Southern – to discuss issues like this and ask for improvements... At the time, we were skeptical anything material would change.
As we also wrote last May...
The STB announced this past Friday it will require certain railroads – all Class I companies, which include Union Pacific – to submit "service recovery plans"... regular progress reports on rail service, operations, and employment... and hold biweekly calls with STB staff.
The decision comes after the board's weekly performance data following the hearing indicated trends in "deteriorating service."
We're not sure if "more paperwork" is the answer, but this sounds like it could address at least some of the short-term bottlenecks on American railroads... either that, or more long hours for employees on trains tasked with the brunt of keeping everyone happy...
Nothing really did change. Like with too many things, everyone acknowledged the short-term crisis and supply-chain bottleneck, but nobody tackled the structural long-term issues in one of our country's most essential industries.
Second, it's sort of like the Southwest Airlines (LUV) holiday debacle. Here is a case of a business delivering self-inflicted wounds... but also, we will note, likely getting away with it.
We heard over and over again from railroad-industry insiders last year that these ridiculously long freight trains cause all kinds of problems... and they mostly reflect a desire to skimp on costs.
Then, at least in part because of those decisions, a disaster happens. The Ohio derailment could cost Norfolk Southern roughly $50 million, based on early estimates. And shares of the company's stock are down about 8% over the past two weeks.
Before you bet against Norfolk Southern...
Understandably, you might be tempted to pile into a bearish trade against the company. I would caution against that, though.
First of all, this accident has a negligible direct impact on Norfolk Southern's finances. It self-insures for up to $75 million in damages for these kinds of accidents, which works out to about 25 cents per share.
Wall Street analysts are currently projecting the company to generate $13.72 in earnings per share this year, so Norfolk Southern may end up paying a relatively small price... and shouldn't have a problem paying out its 2% or so annual dividend.
So, if nothing else, here's a good reason not to base investing or trading decisions on the headlines alone. Whenever possible, you want to make your bets before any stories – good or bad – hit the mainstream.
Last spring would have been a better time to bet against the company. Norfolk Southern shares are down 18% since previous highs last March, back when we were first writing about the trouble on the tracks.
I suspect there will be lawsuits against Norfolk Southern down the road. The damage could get worse for the company. We would love for important changes to happen along American railways. Unfortunately, hope is not a good strategy.
For now, while a terrible situation is unfolding in Ohio, there's still no incentive for major changes in the railroad industry because of it. And there's no reason to assume the company's shares are in peril.
A Silver Exec's Top Advice
We're excited about this week's Stansberry Investor Hour show... Keith Neumeyer – the founder, president, and CEO of major Canadian mining company First Majestic Silver (AG) – shares what it takes to make a fortune in the industry...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 2/15/23): Analog Devices (ADI), AutoZone (AZO), Fortive (FTV), indie Semiconductor (INDI), Ingersoll Rand (IR), iShares U.S. Aerospace & Defense Fund (ITA), Madison Square Garden Sports (MSGS), MasTec (MTZ), Parker-Hannifin (PH), Ryder System (R), and Trane Technologies (TT).
In today's mailbag, feedback on a recent interview by our editor-at-large Daniela Cambone that touched on the high prices of eggs... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Daniela, Always love listening to you. You have great guests with a great mixture of knowledge that gives us all plenty to think about. Thank you. Oh we can save ourselves from Egg Prices and not buy them... I know they are in a ton of stuff but at least personally we are not purchasing them till a little sanity comes back!" – Paid-up subscriber Jeff B.
All the best,
Corey McLaughlin
Baltimore, Maryland
February 16, 2023