The Global Demographic Tailwind

[DewDiligence]

Regional Rail Operator Plans $350M IPO

[I consider BNI and UNP—the two trunk railroads in the Western US—to be participants in The Global Demographic Tailwind for the reason mentioned in the prologue of #msg-39888049. RailAmerica, the pending IPO, operates “short line” tracks that feed the trunk lines, and I don’t know anything about it beyond what’s mentioned in this write-up. I generally avoid IPO’s, regardless of the business, and this one will be no exception.]

http://online.wsj.com/article/SB125530184574579091.html

›RailAmerica IPO Calls the 'All Aboard'

By LYNN COWAN
OCTOBER 12, 2009

The economy hasn't been kind to railroads in the past year, but RailAmerica Inc. is chugging full steam ahead this week with an IPO that is riding on investors' outlook for better times ahead.

The company, which operates regional and short-line tracks -- smaller rail lines that haul individual suppliers and manufacturers' freight to major railways -- has been hit by slower traffic from its customers. Carload volumes fell in 2009 as the economy sputtered, and RailAmerica's revenue declined by 19% in the first half of the year.

Despite the dropping demand, RailAmerica, like many of its larger cousins, has been able to negotiate rate increases; rail transport is still seen as the cheapest way to move heavy materials across long distances. The company has also had success cutting costs and managed to raise its operating income in the first half of the year by 10%.

Investors and industry analysts are looking ahead to modest improvements in railway traffic if the economy strengthens, which could help keep RailAmerica's $357 million IPO on track. The deal is expected to trade Tuesday on the New York Stock Exchange under the symbol RA.

"Moving forward, if we slowly start emerging from the recession, railroads should benefit. A year from now, looking back, railroads will have gained ground," says Ken Kremar, a freight transportation analyst at IHS Global Insight, who forecasts that ton miles should increase by 2.5% in 2010 after losing 12% to 13% in 2009. "But they're climbing out of a very deep hole, and will still have a ways to go to get back to good levels of activity."

An improved outlook for railroads seems to be reflected in the sector's stocks; every major U.S. railway, from CSX Corp. to Union Pacific Corp., has seen its stock gain more than 50% off March lows, though they remain below 2008 peaks. Short-line railway Genesee & Wyoming Inc. closed Friday up 94% from its March low of $16.74.

With 40 different rail lines operating across the U.S. and three Canadian provinces, RailAmerica has operations in every region of America. Its customer base, and by extension, its freight mix, is similarly diverse: agricultural, chemicals, metals, and pulp and paper products together make up about half its freight revenue, with each contributing nearly equal amounts.

Based in Jacksonville, Fla., RailAmerica is reappearing on the market 2½ years after private-equity firm Fortress Investment Group LLC took it private in a $1.1 billion deal. Half of the shares in the offering will be sold by Fortress, so those proceeds won't benefit the railroad; the half that the company sells will be used to pay down debt and for possible investments of acquisitions.‹