Friday, August 3, 2007

CSX: A Great Buy For An Odd Reason

Over year ago my sons and I were waiting at the train station in Worcester, MA for a family member to come for a visit. My kids, who were three and thought Thomas The Tank Engine was (and still is) the coolest thing in the world wanted to leave early that day so they could watch the freight trains in the rail yard. After about 45 minutes of watching I struck up a conversation with the rail worker waiting for the next train to arrive.

He said that in his 15 years there it had "never been this busy" and that there are days that the trains are just lined up trying to get in to get through to various points in New England. I asked him if this was just a local issue and he said that his friends in other areas along the CSX (CSX) line reported the same issues. "It is just crazy everywhere" he claimed.

When I asked him why there were tractor trailers on the train cars he said "it is cheaper to haul them by train and then just move them locally". Why? I asked. "Gas" he said in a word. "As long as gas stays high, it will cost too much to ship by truck and we will haul it all". Bingo...

I asked my kids "if they wanted to buy part of the train company" and after they finished jumping up and down for joy, we went back home that day and bought CSX shares for their education accounts at $23 a share. Just to see their faces, I let them push the "buy" button and laughed as they jumped and clapped as the screen changed. I wanted to teach them about "ownership" and how the business world around them functions and yes I know they were only 3 at the time but even basic lessons are good ones, no?

I figured gas prices were not coming down anytime soon and if anyone new anything this guy would. I dismissed the historical "railroads suck cash" commentary and figured that were were entering a un-historic phase in the US pertaining to gas prices and the use of railroads for biofuels (ethanol). Quick research disclosed that any ethanol into the eastern US was shipped almost exclusively by CSX. That alone would dramatically boost volume. I figured that alone would boost pricing and earnings which would leave extra money for repurchases or dividend increases since building new railroads was probably not in the cards. I did not look into "discounted future cash flows", beta, I did not do a chart analysis or look at earnings 10 years ago to the present, nor did I check to see what Wall St. analyst's felt on the subject.

Well, almost a 100% return in a year and a half would prove that rail worker very correct indeed. In their most recent quarter, CSX produced record earnings and stated pricing and financial results looks to remain strong through the end of the decade. They are also in the process of repurchasing over 15% of the outstanding shares and have tripled the dividend. Word then came out in March 2007 that Carl Icahn, George Soros and David Dremen had all taken large stakes in the company. Maybe they spoke to the same rail worker?

Come to think of it, I bought them shares in McDonalds (MCD) for very similar reasons in 2003 and that has worked out spectacularly also with shares now sitting near their all time high.

Maybe simply listening to the people who are intimately involved with the operations and looking at macro factors is not the "wrong way" after all but the "right way"?

I think I am going to get Peter Lynch's book. Anyone read it?

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