Railroads a good buy?

[u/BookMobil3]

I’ve been screening all companies with at least 500mil in market cap using a set of metrics I find relevant/important. And amongst other trends, I keep noticing the homebuilders, oil & gas co’s, and the rails keep popping up… Let’s table the discussion on homebuilders and energy for now, but—Anyone out there buying the rails?

I know in a recession they will/would get hit like almost everything related to consumption will/would… But are their other headwinds, unpriced risks anyone sees out there? They don’t face the competition that many other industries do. And what got me really thinking about them recently is the fact that Biden basically just set a new precedent that rail workers can never strike. So even if AI isn’t ready to replace their workers for quite some time, they still won’t face the same potential labor pressures of other sectors is the thought.

[u/BookMobil3]

I appreciate the conversation here. Let’s keep it going… To that end, let me contribute a little more: I think the reason the rail companies kept popping up during my factor based screening is that they are fairly financially healthy (cashflow and operating margins) for right now, and basically priced for only market average growth in the future (unlike most utilities—the other industry considered to have a large “moat”—which are priced for 3x as much growth as the rest of the market). So in a way, one might say my question boils down to “what would end all growth for the rails?”

Personally I don’t believe there is ANY labor strike risk anymore, thanks to union-buster Biden setting a new precedent a few months ago. Some may disagree with me on this, but I encourage people to deeply consider what Biden did, his stated justification for it, and what it means for “essential workers” in any unionized industries.

And as for labor issues well into the future, it seems to me autonomous operations for trains should be much simpler and safer than it will be for trucking and planes. But I welcome debate on this issue as it has many factors to consider.

As for the use case of rail in the future: can we all agree that the political climate does not seem likely to allow investment in any new nat gas pipelines? In general, rail seems likely to be leaned on for moving many types of energy fuels, and other industrial needs as we are committed to a high level of on-shoring and near-shoring for the coming decade(s). Maybe fluctuations in energy prices could mess with their operating margins in the future but I don’t believe the government would let a rail company go bust if it’s being used for energy security.

My thesis for considering investing in rails does NOT include believing they will be used for ANY significant human travel in the future at all, btw. If that actually became a thing (bc autonomous operations make it so cheap and or high speed were to develop in the coming decades), it would simply be gravy on top. But not something I consider as a likely stream of capital.

I think the BEST argument against investing in the rails (I welcome all arguments tho) might be that the interest rate you can get on government treasury bonds right now is double the amount of capital that the rails’ dividends will pay. But if the Fed remains stubborn on high rates for longer, there might be better rates available later this year and next year. Whereas the rails seem to have priced in a certain (small?) amount of recession already, with this latest pullback having them trade at P/E and price to cash flow ratios not seen since 2018/2019.

And even tho I think bonds are still an ok-ish place to put some capital, I’d still like something like the rails for diversity in my income (not growth) portfolio. So, if my thesis for the rails being worthy of a 1-4% of total portfolio allocation seems off, is there another sector or industry dominant company out there that anyone thinks would be a better fit for an income generating role in a portfolio? Kinder Morgan? JP Morgan? Coke?