https://docs.google.com/spreadsheets/d/1cuqMq5NtbebCQ0tnrcMdx7QzBsO0D03hxt3FWgvPO78/edit?usp=sharing
Now, a few things:
I. CSX is the only one with a 6.00% earnings yield, everyone else swims around the 5% mark. Now these numbers are based off of their most recent 10-K filing. For my liking, I want to see a minimum of 6% earnings yield in an investment.
II. Railroads are capital intensive industries and their capex should reflect the needed requirements. What I call the growth-rot rate (Capex/D+A) should reflect a company's growth or maintenance capex in relation to their depreciation/amortization. If capex is greater than depreciation then that means the company is growing faster than their assets are rotting, if depreciation is less than capex then that means the company is shrinking faster than they can replace rotting assets. Now if this happens for one year then I get that business may just suck for one year. It happens. But I don't want to see a trend of D+A being greater than capex because that means the company is shrinking and as an investor that's what I don't want.
III. You'll also see OCF and net income compared against one another. This is to show the quality of earnings, as OCF should be higher than net income, generally showing that the company has quality earnings. The years you see highlighted in red on the Data spreadsheet are the years where three companies (which struck me as odd and I may do some more digging into this), had net income greater than OCF, meaning the earnings were of poor quality. Now, once again as with capex and D+A, one year doesn't destroy the company like that. But I don't want to see a trend of it happening as it may indicate greater problems.
IV. Keeping next to me my trusted copy of The Investments of Warren Buffett, I looked at the estimated valuations that he paid for BNSF back after the GFC. He paid an estimated 13.2x EV/EBIT and 2.66x P/B in 2009 and 11.0x EV/EBIT and 3.06x P/B in 2008 (he made his investments in tranches, indicating that the valuation multiples would fluctuate between starting his stake and closing it out with buying the whole company). This is not a rock bottom, or even a cheap price to pay for a railroad company. But he was very confident in BNSF's ROTCE capabilities and management to pay that price (also don't get too stuck on the whole P/B thing as the indicator of a good business, as he's mentioned before in interviews that'd he'd rather pay for a company 2.0x-4.0x P/B because anything less than 2.0x usually means there's systematic business issues, whereas his mentor Benjamin Graham wanted cheap stocks, not cheap and good, as Buffett looks for).
I'm looking for a solid investment in railroads (all the richest names in investing make money on railroads, especially Icahn with American Railcar). Let me know what I can work on with my valuations that I've done. I'm currently working on adding cost of debt and estimated WACCs for all these companies also.
Submitted September 16, 2019 at 09:44PM by howtoreadspaghetti https://ift.tt/2QfZoK1
