TCI has almost a quarter of their 13F book in the Class 1 rails (namely $CP $CNI & $UNP ). Competitively-advantaged, irreplaceable, well-run companies? Sure. But I just can't see how the math works out such that these are compelling investments at today's prices.
1/ Let's look at $CSX (because that's the one I have an up-to-date model for and because they're all pretty darn similar). In the last five years (2014 - 2019) CSX carloads shrunk at a ~ 2% CAGR, revenue/carload grew ~ 1% so total revenue shrunk at ~ 1%.
2/ Margins exploded, with EBITDA margins going from 38% in FY14 to 52% in FY19 while CapEx invensity shrunk with CapEx/Sales going from 19% to 14% over the same period. EBITDA - CapEx margins therefore more than doubled from ~ 18% to ~ 39%.
3/ That was the past. Kudos to those who figured the margin angle out. You've done brilliantly. But what about the next five years? Let's say they grow carloads ex coal at +3% while coal carloads (14% of total) shrink at -6%. That would equate to total carload growth of +1.7%.
4/ Let's say pricing is -1% this year and then +2% from next year on for LFL carloads (which translates to ~ 1.5% blended rev/carload growth given mix-shift from high-priced coal to low-priced intermodal). That all shakes out to a +2% revenue CAGR from 2019 to 2024.
5/ Let's flow that through at the kind of mid-60s incremental EBITDA margins they've been delivering for the last five years and EBITDA margins will be getting to 56% by 2023 leaving EBITDA of $7.4b / EBIT of $5.9b / PBT of $5.1b / PAT of $3.9b / EPS of ~ $6.1 (given buybacks).
6/ That put's the stock on 13x 2024 EPS. Is it crazy expensive? Of course not but it's a capital-intensive business eking out low single digit revenue growth with margin expansion opportunities largely tapped out. It's probably not worth a multiple that starts with 2.
7/ Instead, put that on 18x and your're looking at a $110 share price. Add a few bucks of dividends and you're looking at roughly 45% upside from the current $80 price over two and a bit years or a +12% IRR.
8/ Is that really juicy enough to have almost 25% of one's fund in the space. What's the uber-bull case here that I'm missing? Would love to hear.
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