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The year 1869 was a pivotal date in American history. Before then, the American West was an isolated place -- in many ways similar to the wild frontier that we see depicted in black-and-white western films. The problem was one of simple geographic isolation. America is a big country, and in the 1800s most of the population centers were concentrated in the East. Moving a simple letter from the capital of Washington D.C. to California involved weeks of traveling by stagecoach or the Pony Express. And such a journey wasn't without risk -- Native American tribes still controlled large territories across the West, and attacks on convoys crossing the plains were common. But in May of 1869, atop Promontory Summit in Utah, all that changed -- America's coasts were finally united when the first U.S. transcontinental railway link was established. But opening the West to trade isn't the only reason the railroad industry has been an important part of history. Most investors recognize names like Cornelius Vanderbilt or James Gould. These early multi-millionaires made their fortunes owning railroad lines. Those fortunes became the basis of America's rising industrial power -- descendants of these captains of industry went on to found some of the nation's pre-eminent corporations. Through the first three decades of the twentieth century, the railroads remained among the largest and most important stocks trading on the U.S. exchanges. Today, railroad stocks aren't as high profile or as widely followed as they once were. After all, modern captains of industry have made their fortunes in businesses like software and biotechnology, not by owning railroads. But that doesn't mean the railroad industry isn't important. In fact, railroads are arguably just as important to the U.S. economy today as they were in 1869. Freight is moved around the U.S. using a variety of different methods. Airplanes can traverse the nation in a matter of a few hours. And modern electronic communication like email eliminates the need to carry paper messages or packages across the country at all. Moreover, thanks to a vast roadway network, giant trucks also compete with rail to carry freight from sea to shining sea. Some might imagine that the railway industry is hopelessly anachronistic. But check out our chart.
The continued dominance of the American railroad makes sense. All those imported goods pouring into U.S. container ports from around the world need to be transported to your local retailer for sale. While airlines might be faster, the massive amount of goods imported into the U.S. each and every day would be extraordinarily expensive to transport by airplane. And if you drive regularly, you're familiar with the problems inherent to transporting goods by road -- rising gasoline prices and traffic congestion across the U.S. have made transport by truck ever slower and more expensive. Meanwhile, railway lines extend directly into the heart of just about every American city or town, offering a congestion-free conduit to the consumer. Moreover, consider that a train can move a ton of freight more than 700 miles on a gallon of fuel -- no car, truck, or plane can manage that sort of efficiency. Better still, railroads are now benefiting from a number of positive catalysts. Specifically, for most of the 1980s and 1990s, railroads were not in a position to command favorable prices for hauling freight. The reason is simple: an oversupply of rail capacity led to cutthroat competition and falling shipping rates. But that's rapidly changing. For nearly two decades the nation's railroads invested little money in infrastructure -- with rates low, there was little incentive. Thus, America's rail freight capacity had been declining for years and was in a poor state of repair by 2000.
Meanwhile, in recent years demand for rail transport has been growing rapidly. More than half the nation's electric grid is powered by coal plants, but supplies of coal near major population centers in the Eastern U.S. are declining. To fill the gap, utilities are sourcing coal from western states. All of that coal is hauled by railroad from western mines to electric plants in the East. In addition, there has been a boom in container ship traffic into the nation's major ports. More than half the containers shipped into the U.S. are transported at least partly by rail on their journey to consumers. Moreover, there are agricultural products. Corn, wheat, and other grains are grown primarily in central regions of the U.S.; these commodities need to be shipped to port cities for export. With demand for America's agricultural wealth expanding rapidly overseas, rail shipping capacity is in high demand. Finally, ethanol cannot be shipped by pipeline because it bonds with water and corrodes pipes quickly. It is instead transported by ships, rails, and trucks. And with the large amount of ethanol produced in the Midwest, the use of rail transport is crucial to getting it moved to consumers. Thanks to rising demand and constrained rail capacity, fares for hauling freight are rising rapidly. All signs point to an rosy future for the railroad industry. Increased fares, higher demand, and few substitutes means they should be a popular, safe pick for investors.
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Despite
all the advances of the last 140 years, the nation's railways remain at the
heart of the U.S. economy. Some 42% of all freight moved between U.S. cities is
moved by rail -- that's more than trucks and river barges combined.
