Usually when I research a company I look for trade journals in the relevant industry. I currently subscribe to Railway Age. I have learned a lot about the railroad industry from this magazine. I received the latest copy via email today. I found something that is relevant to my recent purchase of RAIL:
EPA sees continued "solid" freight car demand
"Despite a slowing momentum in orders during the current traffic downturn, Economic Planning Associates in a newly revised forecast says there are signs that "demand for rail cars will remain on solid footing for a number of years to come." EPA cited "replacement pressures and technological advances as well as legislative measures" as reasons for optimism. EPA expects builders to deliver 66,500 cars this year and 63,000 in 2008. Meanwhile, actual figures from the Railway Car Institute Committee of the Railway Supply Institute said builders delivered 16,643 new freight cars in the second quarter, down from 19,466 in the corresponding period last year. New orders were placed in the first quarter for 11,595 cars, compared with 19,190 in the 2006 quarter. The backlog of new cars on order but undelivered slipped to 73,921 on July 1, compared with 85,692 on July 1, 2006 . First-quarter 2007 orders included 4,236 tank cars, 2,706 open top hoppers, 2,200 inter modal platforms, 831 non-inter modal flat cars, 632 covered hoppers, and 500 boxcars."
The figure above are for rail cars in general not specifically coal cars. Nonetheless, coal car figures generally follow total rail car figures.
A recent Fortune article titled Going nuclear discussed the merits of nuclear power. As many as 150 coal power plants were in the planning stages as of this summer. But, political opposition has caused many of the utilities to abandon plans for new coal power plants. Despite this many of the plants did get approval and are currently being built or are in the planning stages. Just like nuclear power, coal is being questioned because of its negative environmental effects. Nuclear power has many of the same issues as well. Utilities and scientists are working on ways to decrease the amount of CO2 emissions that coal power plants generate. The amount of coal deposits in the U.S. has oftentimes been compared to the amount of oil in Saudi Arabia. I continue to believe that coal will fill a larger part of our energy needs in the future.
In my first post on RAIL I calculated that the company will be able to earn 67 million in normalized earnings. Another interesting way to think about this situation is to calculate what the company has to earn to maintain the current price.
Market cap is 533 million - 200 million in cash = enterprise value of 333 million. So, if RAIL earned just $33 million and traded at only 10 times earnings the current price would be maintained. So, therefore if I am extremely off on my calculations and RAIL makes half of what I calculated it will make, I will break even. In other words, I have a strong margin of safety if I am wrong on my calculations or something negative happens to the company.