Planes, Trains and Trucks
I find the evolution of the transporting of goods in the U.S. quite fascinating. The growth of our large cities can usually be traced back to the transportation facilities available in earlier years.
In the early colonial days of this country, settlements became concentrated around bodies of water: the Atlantic Ocean, various bays and rivers. Boston, New Amsterdam (New York City for those like me who have forgotten their seventh grade history), Baltimore, Washington, D.C., and Charleston all sprang up because they provided waterfront suitable for cargo and passenger vessels.
How did the rest of the new nation get to be populated (or overpopulated)? Simply put: transportation. The progression of this country’s transportation system came to define the communities we live in. If you now live in an urban area, there is probably a waterway, railway, highway or airport not far away. However, if you’re not close to major transportation, you likely live in a rural area.
Settlements in America began to spring up away from the coast when transportation began to improve. The first transport system to evolve was a system of canals. Around 1800, when John Adams was president, the only means of transportation between interior villages and their coastal neighbors was by foot, pack animal or ship. Political leaders in the U.S. formulated plans for the construction of roads and canals. Businesses constructed the roads and canals, which connected the distant parts of the nation.
In 1808, the federal government funded the construction of interstate turnpikes and canals. The British blockade in the War of 1812 demonstrated the new country’s value of these overland roads and canals for military operations as well as for general commerce.
Numerous canal companies gained charters; but only three had been completed when the War of 1812 broke out. In 1817, the construction of the Erie Canal was completed. Like the turnpikes, the early canals were constructed, owned and operated by private corporations but later on, larger projects were funded by the states. The Erie Canal was the first canal project undertaken by a state.
The Erie Canal spawned a boom of canal building around the country with 3,326 miles built by 1840. The canals provided a means to transport passengers and cargo from the coast to interior sections of the nation, the Great Lakes and eastern Canada.
The usefulness of canals began to diminish when railroads came along. Like canal building, private enterprise built nearly all the country’s railroads. Baltimore and Ohio Railroad (B&O) was the first chartered railroad in 1827. Numerous short lines were built during the early years, especially in the south, to provide connections to the river system.
The first Transcontinental Railroad in the U.S. was built across North America in the 1860s, linking the railroad network of the eastern U.S. with California on the Pacific coast. Heavily backed by the federal government, the Transcontinental Railroad was completed in 1869 at Promontory Summit in Utah. The building of the railroad required enormous feats of engineering and labor in the crossing of plains and high mountains. The Union Pacific Railroad built the line westward and the Central Pacific Railroad built the line eastward.
By 1867, the Canadian Grand Trunk Railway had already accumulated more than 1,277 miles of track. The Grand Trunk connected the five New England states with the Canadian Atlantic provinces. From the provinces, it also connected westward through Sarnia, Ontario, to Port Huron, Michigan.
Railroads were indispensable to the development of a national transportation system in the late 1800s. The railway remained the dominant form of transportation until the invention and proliferation of the automobile. During the 40 years from 1850 to 1890 rail mileage increased from 9,021 to 129,774.
Mainline railroads concentrated their efforts on moving freight and passengers over long distances. Smaller Interurban railroads focused primarily on passenger traffic for their revenue. When the Great Depression hit, the smaller railroads were unable to survive. Their larger brethren balked at providing passenger rail service for the burgeoning commuter populace in and around the struggling larger cities.
Development of the Interstate Highway System and of commercial aviation in the 1950s and 1960s, dealt a damaging blow to rail transportation, both passenger and freight. Interstate trucking companies became formidable competitors.
In 1971, the federally funded Amtrak took over almost all intercity passenger rail service in the continental U.S. Freight transportation continued to struggle under federal and state regulations. An unfortunate start was the 1968 formation and subsequent bankruptcy of the Penn Central, barely two years later.
Prior to Amtrak’s creation in 1970, the same companies that provided freight service provided intercity passenger rail service in the U.S. When Amtrak was formed, in return for government permission to exit the passenger rail business, freight railroads donated passenger equipment to Amtrak and helped start it with a capital infusion of $200 million.
Popular and political support for Amtrak has allowed it to survive into the 21st century. To help preserve a declining freight rail industry, Congress passed the Regional Rail Reorganization Act of 1973, which created the Consolidated Rail Corporation (ConRail), a government-owned corporation.
The freight industry continued its decline until Congress passed the Staggers Rail Act in 1980, which largely deregulated the rail industry. Since then, U.S. freight railroads have reorganized, discontinued their lightly used routes, and returned to profitability.
Railroads annually move more than 25% of the nation’s freight. The railroad industry effectively connects businesses with each other across the country and with markets overseas. Railroads account for more than 40% of freight ton-miles, more than any other mode of transportation.
Trains are desirable because they carry large amounts of cargo over a vast network of rail. Under the right circumstances, freight transport by rail is more economical and energy-efficient than by trucks over roads, especially when carried in bulk or over long distances. Railroads claim to be three times more fuel-efficient than trucks.
Railroads lack flexibility, though. Rail freight is often subject to multiple shipping costs, since it must be transferred from one mode of transportation to another. Practices such as containerization aim at minimizing these multiple costs.
The fastest growing rail traffic segment is currently intermodal. Intermodal is the movement of shipping containers by more than one mode of transportation, often trucks, ocean-going vessels, and rail. Intermodal combines the door-to-door convenience of trucks with the long-haul economy of railroads and ships. Rail intermodal volume has tripled in the last 25 years and plays a critical role in making logistics far more efficient for retailers and others. The efficiency of intermodal provides the U.S. with a huge competitive advantage in the global economy.
As mentioned, the U.S. interstate highway system was largely constructed during the 1960s and 1970s.
Truck haulers transport all types of cargo by road and deliver everything from letters to houses to cargo containers to and from ports and rail yards. Haulers offer fast, sometimes same-day, delivery. A good example of truck cargo is food, but retailers of all kinds rely upon delivery trucks.
Early toll roads were constructed and owned by corporations that sold stock to raise construction capital like Pennsylvania's 1795 Lancaster Turnpike Company.
Aircraft were first used for carrying mail as cargo in 1911. Today, large aircraft employ quick-loading containers known as Unit Load Devices (ULDs), similar to containerized cargo ships. Air cargo shipments typically need to move at much faster speeds, but are limited in size and weight.
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The history of freight transport in the U.S. and other countries is intriguing. Various modes of transportation have come and gone, replaced by more efficient methods. But now versatile containers are helping to interconnect trucking, railroads, and vessels (ships), which when brought together form a very cost efficient way to transport cargo not only around the U.S. but indeed around the world.
Containers are the largest and fastest growing segment in the world of freight transportation. Containerized cargo includes everything from auto parts, machinery and manufacturing components to shoes and toys, and frozen meat and seafood.
One of my subscribers to the Cabot Benjamin Graham Value Letter, Chris M. from Illinois, brought a terrific company to my attention recently. It’s one of the biggest companies in the intermodal container business and is experiencing a huge increase in demand for the use of its containers.
TAL International Group (TAL) is one of the world’s largest lessors of intermodal containers and chassis. The company buys intermodal containers that can be transported on ships, trucks and railcars enabling containers full of goods to travel great distances with a minimum of handling.
TAL’s operations include buying, leasing and subsequently selling multiple types of intermodal containers. TAL is also involved in reselling containers to container traders and users of containers, as well as financing port equipment, such as container cranes, reach stackers and related equipment. The company owns 856,000 intermodal containers.
Demand for containers dwindled in 2009, but rebounded with a vengeance in 2010. TAL’s utilization rate reached a record 98.6% at the end of 2010 despite adding 180,000 containers during the year. Container purchases are primarily financed by the company’s bond offerings. TAL’s bonds are rated “A” by Standard & Poor’s and carry an interest rate of 4.8%.
Strong demand is causing a global shortage for containers, which is driving leasing rates and resale prices significantly higher—all to the benefit of TAL. Part of the stronger demand can be attributed to reduced direct container purchases by TAL’s shipping customers to avoid new capital expenditures.
TAL has already ordered another 180,000 containers for delivery in 2011, many of which have already been committed to leases. As a result, the company expects profits to accelerate during the next several quarters. Sales increased 7% and EPS catapulted from $0.72 in 2009 to $2.32 in 2010. My best guess is that sales will rise 18% and EPS will increase 25% to $2.90 in 2011. Growth in 2012 will likely decelerate.
At 11.9 times my 2011 EPS estimate and with a big dividend yield of 5.2%, TAL shares are very attractive, but speculative. I recommend buying TAL at the current price.
Until next time—be kind and friendly to everyone you meet.
J. Royden Ward
For Cabot Wealth Advisory
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