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Why Working on the Railroad is Great Money

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, September 13, 2006

Marmaduke is a small town in Arkansas. The population is twelve hundred people.

Marmaduke sits right in the heart of tornado alley. On April 2, 2006, an F3 tornado hit the town. The tornado recorded speeds of 200 miles an hour and measured between half and three quarters of a mile wide.

The storm flattened ninety percent of the town.

The level of devastation was staggering,” said the governor of Arkansas.

Luckily, no one died in Marmaduke. There weren’t even many injuries. The tornado uprooted trees, turned over cars, and destroyed hundreds of buildings. Fifty percent of the town’s residents lost their houses. Power lines lay in the streets like spaghetti, but the townspeople stayed safe.

One piece of news in particular caught my attention. The tornado destroyed a plant belonging to American Railcar Industries. ARI makes freight cars, freight car components, and provides maintenance services.

I have repeatedly made the argument that the railroad industry is beginning a long boom. The basic story is this: over the past three decades, a 118% increase in freight rail demand on a ton per mile basis is being handled over a rail network that has shrunk from 214,387 miles to 105,000 miles.

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In order for demand and supply to do business, the price must increase. It’s already happening. One measure is the lease rates for railcars. This is the price the railroads pay to borrow railcars from freight car owners. Rates hit an all-time high this year.

Another measure is the stock prices of the railroads themselves. Union Pacific, the largest railroad stock in the world, is up around 30% since 2005. Smaller railroads have performed even better.

We’re still in the early stages of this trend. The industry bottomed in 2002. It was the worst year in a decade and a half for freight car deliveries. Only 17,714 freight cars were delivered, down from 74,223 three years prior. And Union Pacific stock was down 50% from its high in 1996.

We’ve recommended the railroads themselves as a way to play this trend. I’ve written about Norfolk Southern, Kansas City Southern, Canadian National and Burlington Northern Santa Fe all in the last year.

There’s another trend I like here: increased investment in railroad infrastructure. The railroad system has been shrinking for decades. Here’s another way of looking at it:

Since 1950, the railroads have increased their output by 173%. In the same period, employment of railroad workers has fallen from 1.4 million to 258,000. But the trend is turning around.

The railroads are hiring aggressively right now. In fact, average railroad worker compensation including benefits in 2005, according to stats from the Association of American Railroads, was $92,598.

It’s the same situation with railroad infrastructure. With all this new business coming their way, and the higher prices for moving it, we should see a huge expansion in railroad capacity.

The companies that make freight cars, railroad components, and provide maintenance services will have a booming business. Let’s call them the railroad builders.

The names here are Greenbrier (GBX), a specialty manufacturer of flatcars for carrying container boxes… FreightCar America (RAIL), a maker of all freight cars, but specialists in coal hoppers… Trinity (TRN), the largest producer of freight cars in the world… and of course, American Railcar Industries (ARII), whose plant was destroyed by the tornado in Marmaduke.

One last thing that interested me: The tornado destroyed ARI’s manufacturing plant on April 2, yet between April and June, ARI had its most profitable quarter on record.

The plant has reopened now. And the company was insured. The point is this:

Business is good in the freight car business. Consider taking part in it.

Good investing,

Tom





Market Notes


AN EXPERT’S TAKE ON THE BULL MARKET IN DRUG STOCKS

The past four months have put a huge dent in several of the most durable uptrends in the world. Emerging market stocks, precious metal miners, and crude oil have all taken a beating.

The major trend that hasn’t skipped a beat? Drugs.

Pharmaceutical firms like Johnson & Johnson, Merck, AstraZeneca, and Novartis are all sporting solid sales growth and rising stock prices. This environment is super bullish for ETFs like the iShares Global Healthcare (IXJ) and the Pharmaceutical HOLDRs Trust (PPH). Both funds hit a new high this month.

For an expert’s opinion on the drug sector, we asked Rob Fannon, the editor of Phase I Investor for his take on what’s happening here:

I know it’s a simplistic explanation, but let’s face it: There’s a lot of affluent people out there who are interested in living as long and as well as possible. Big Pharma helps them do that. And many drug stocks like Pfizer and Johnson & Johnson are still good values at these levels. It’s a great time to be a pharma investor…”



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