Is the US on track for another rail revolution?
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Associate Editor
David Stevenson Apr 24, 2009
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Barack Obama has signalled a "US rail revolution", says The Independent's David Usborne. The new President has just earmarked $13bn to be spent over five years, for "the most sweeping investment in our infrastructure since President Eisenhower built the Interstate Highway System in the 1950s".
It's all part of the plan to spend America out of the economic slump, with Obama calling on Americans "to climb aboard with his ambitious vision of building high-speed rail corridors along ten of the country's busiest routes", says The Guardian's Suzanne Goldenberg.
The upgrade is long overdue. American rail investment has lagged so much that alternative modes of transport – roads and airports – are jammed. That's costing up to $80bn a year in lost productivity, the President says.
America has just one high-speed line: the Acela, which runs between Washington, New York and Boston. But although the train can reach 150mph, it rarely goes above 80mph because of ageing tracks. "We're decades behind Europe and Asia in developing high-speed infrastructure," says Rick Harnish at the Midwest High Speed Rail Association.
The administration wants a mix of upgraded existing lines and new track to allow trains to reach average speeds of 100mph – still slower than in Europe, but a big boost on today's efforts. California has plans for trains with 220mph top speeds, cutting travel time between Los Angeles and San Francisco to two and a half hours – short enough to compete with flying.
Meanwhile, in Chicago they foresee a network for all the Midwest, to be built before 2016 when the city hopes to host the Olympics. Other priority lines include the Gulf Coast corridor from Houston through New Orleans to Birmingham and Atlanta, the south-east corridor from Washington DC down to Jacksonville, and from New York City to Buffalo.
But is this the dawn of a new train golden age? Not everyone is convinced.
"There's no huge pent-up demand for rail service," says Adrian Moore at the Reason Foundation, "it's more like 'build and hope'."
And $13bn – just a fraction of European state rail investment – really isn't much money these days. This is why "transport officials will now scramble to come up with proposals that'll win favour in Washington", says Usborne, as "construction of the California line alone is expected to cost as much as $45bn".
Nor has the administration flagged up where the money is needed most, or what type of high-speed train will be used. There's plenty of talk about magnetic levitation (maglev), while the California scheme centres on a steel-wheel bullet train between San Francisco and Los Angeles.
But "high-speed rail is mind-bogglingly expensive", says Guy Darst in the Boston Herald. "The European trains so praised by the president all eat large subsidies (about $88bn a year overall)."
But there's no real need for America to follow Europe. Harvard Professor John Stilgoe, author of Train Time , reckons that far less ambitious improvements would suffice to encourage plenty of people to switch from air travel to train: "A lot of people want to travel at 100mph for distances up to 150 miles. Improving the current infrastructure, and in some places really upgrading it, can be done with existing technology".
This means the best way of playing Obama's rail revolution could be to go right back to basics, as we describe below.
The best bet in the US rail sector
Railway product manufacturers don't come much more down to earth than LB Foster (NASDAQ:FSTR). This Nasdaq-quoted metal-basher makes rails, tie plates, spikes, screws and anchor bolts and sells steel piling and corrosion protection coatings. It's exactly what you'd want if you're looking to build your own full-scale train set. Most rail kit suppliers are divisions of multinational conglomerates, so buying into these would only get you diluted exposure to the Obama rail revolution. With Foster, you get in at ground level.
At a price of $27.88, the firm's market capitalisation is just $285m (£196m). However, the stock is widely held among investment managers, who have no doubt spotted the remarkable strength of the company's balance sheet; at the end of last year this contained more than $10 a share of net cash out of overall shareholders' funds of more than $20 a share.
The near-term earnings growth picture is slightly less exciting, but free cash-flow generation is steaming ahead smoothly. On consensus forecasts of $1.93 for the current year, followed by $2.05 for next, Foster is on track for a 2010 p/e of 13.6 times. The stock has more than halved since December 2007, and analyst Liam Burke of Janney Montgomery Scott reckons $38 now represents fair value.
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