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Railroads Lay Track for Oil, Freight & Profit

Michael Hooper
November 8, 2013

Train-to-truck and crude oil shipments are growing like gangbusters in the railroad industry, and to keep up, railroads are pouring billions into brand-new infrastructure. But those extra tracks, yards, and terminals don't come cheap. To achieve real growth, railroads need enough money to not only maintain what they have, but keep expanding. Thus, investors seeking winners in the railroad sector should look for companies with the highest returns on their capital investments.

How railroads are reinvesting their cash
BNSF Railway, owned by Berkshire Hathaway (NYSE: BRK-B), is spending a record $4.3 billion to maintain and expand its network, up 19.4% from capital expenditures in 2012. The company is the leader in capital investments in 2013, compared to six other North American railroads. 

BNSF is spending $800 million on "expansion capital," according to spokesman Steven Forsberg. That amount includes more than $200 million to expand track and rail yard capacity through North Dakota and eastern Montana, where railroads have experienced a boom in shipping crude from the Bakken formation. 

BNSF is also spending $1.1 billion on locomotive, freight car and other equipment, much of which will serve North Dakota. In addition, the company is completing its Logistics Park Kansas City. Right now, its cranes there can lift 500,000 truck containers and trailers annually, but that number will grow to 1.5 million containers at full capacity.

Union Pacific (NYSE: UNP) invested a record $3.7 billion in 2012, and it expects to invest another $3.6 billion this year in capital improvements. Union Pacific planned to complete a total of 1,500 projects across its 32,000-mile network this year to help improve train operating efficiency, reduce motorist wait times at crossings, and enhance safety.

Canadian National Railway (NYSE: CNI) expects to spend $2 billion on capital programs in 2013, up from $1.73 billion in 2012. CN is building an intermodal terminal in Joliet, Ill., and completing its Calgary Logistics Park. CN will spend $200 million in 2013 for the acquisition of locomotives, intermodal equipment and cars.

Last May, Canadian Pacific Railway (NYSE: CP) announced that it was increasing its 2013 capital budget 10% to $1.2 billion. The extra money came from a higher-than-anticipated cash-flow projection. The company upgraded track on the north main line between Winnipeg, Manitoba, and Edmonton, Alberta; and improved signaling systems on a mainline between Moose Jaw, Saskatchewan, and Chicago.

Measuring greatness
Railroads' return on invested capital is perhaps the best measure of whether managers are allocating their capital wisely. To calcuate this metric, divide a company's earnings by its total capital. Here are ROIC numbers for seven Class I Railroads:

Name 2011 Return On Invested Capital  2012  2013
Union Pacific  10.77  12.81  13.23
Canadian National  12.75  13.81  12.66
Canadian Pacific  12.03</