The continuing build-out of the Internet offers investment opportunities, and money is starting to pour into repairs of the nation's highway network.
Despite the calls of the pileated woodpeckers and my daughter's questions about where the mules walked, I couldn't help thinking about investing in infrastructure as I hiked along the C&O Canal towpath near Point of Rocks, Md.
From Point of Rocks you can see almost 200 years of American infrastructure -- some of it abandoned forever, some almost lost and then revived, some in heavy use but crumbling. If you're looking for a crash course in about how to think about investing in U.S. infrastructure today, Point of Rocks is a great place to start.
In this column I'm going to give you a four-part system for thinking about infrastructure investing, as well as seven high-tech and two distinctly low-tech infrastructure ideas to research.
Today the long-deserted canal and the tracks of what was once the Baltimore & Ohio Railroad -- now CSX (CSX) -- share a tiny bit of flatland between a huge finger of rock and the Potomac River. This stretch of land was the prize in an epic court battle in 1828 between the canal company and the railroad, with Daniel Webster and future Supreme Court Chief Justice Roger Taney leading the two sides. The battle almost bankrupted the canal company before the two sides reached a compromise that gave the railroad the right to share the narrow right of way.
The canal company's attempt to use the courts to block its competition failed within 30 years. By1850, when the canal reached Cumberland, Md., the midpoint in the company's plan to tie the Ohio Valley to the Atlantic, the railroad had already been in business there for eight years. The canal company abandoned that plan, and by 1889 the canal company and its right of way were owned by the Baltimore and Ohio Railway, which itself used its control of the Point of Rocks right of way to block the Western Maryland Railway. In 1924, the canal went out of operation.
If you stay overnight in the house at Lock 28 that once sheltered the lockmaster and his family, you know that what was once the B&O Railroad still carries a lot of freight -- much of it in the middle of the night. The B&O, the first railroad in the United States to offer freight and passenger service to the public, broke ground for its network in 1828. By 1889 the railroad was handling 89% of U.S. tidewater traffic in soft coal. And then came competition with other railroads; by 1896 the B&O was shipping just 4% of that soft coal traffic. And then came competition for passenger travel from highways. Revenue passenger miles fell from 878 million in 1925 to 64 million in 1970. By 1964 the Baltimore and Ohio was effectively owned by the Chesapeake and Ohio Railway, and in 1987 the B&O became part of the CSX system.
Jim Jubak
As you walk to the lock house, you pass the bridge that takes U.S. 15 across the Potomac to Virginia. U.S. 15 is one of the original 1926 U.S. highways. Parts of its 792-mile length now run parallel to the more modern U.S. Interstate Highway System. But the highway is still a critical link in moving people and goods from South Carolina to New York. (The Potomac U.S. 15 Bridge played a major role in killing the Potomac River ferries. Today White's Ferry, just slightly downstream from Point of Rocks, is the last operating ferry on the river.)
So what's all this got to do with investing in infrastructure? This scene gives you a rough scheme for separating good infrastructure investments from bad.
First, infrastructure categories do die -- even if the death throes are drawn out. It took a long, long time to actually kill off the C&O Canal, even though by the time it reached Cumberland, Md., eight years behind the railroad, the demise of the canal company was assured. Because so much money has been invested in an infrastructure company such as the canal, however, the business has the ability to raise large sums of capital on those assets to cover "temporary" losses. And there often seem to be an endless stream of new owners who believe they can turn the situation around.
Second, infrastructure categories can reorganize and reinvent themselves. The railroads are a good example of this -- they shed their money-losing passenger services (the state of Maryland now runs the commuter trains that run on the old B&O tracks) -- and after rounds of mergers reinvented themselves as profitable freight operations.
Third, new infrastructure categories do emerge to kill off or seize a major share of business from entrenched infrastructure champions. Highways did this to railroads, for example (with the benefit of public-sector funding).
And, fourth, some infrastructure categories look to be so valuable that reinvestment to keep them operating is just about guaranteed. That U.S. 15 bridge across the Potomac fits that category.
Which current infrastructure investments fit into under these four rubrics?
Airlines are probably not Category 1 -- they seem unlikely to disappear, short of the invention of Star-Trek style transporters -- but they don't seem to fit smoothly into Category 2 either. I don't see an easy model that produces consistent profits from existing (or even merged) airline companies because it remains far too easy to raise capital to buy planes and start a new airline.
In my schematic, airlines are struggling to find a transformation equivalent to that of railroads and, until they do, they remain a cyclical bet. Buy the best operators when the losses for the industry are really large and sell when profits are in a recovery mode.
Overnight document and freight companies such as FedEx (FDX) and United Parcel Service (UPS) look to have a clear route to a railroad-style restructuring. Alternative document-delivery technologies continue to eat away at that part of these companies' business, but that leaves them with the lucrative just-in-time freight-delivery market.
And that market is growing as more and more of commerce moves to the Internet. Every sale at Amazon.com (AMZN), for example, is also a potential sale of FedEx and UPS. The attractiveness of that business and its solid prospects are currently buried under the difficulty of restructuring the delivery networks at those companies to cut out some of the costs inherent in a door-to-door one-document at a time delivery system.
The big March 21 earnings miss at FedEx, for example, was largely a result of delays in achieving $1.7 billion in cost savings by 2015. The consensus among analysts is that this job is so hard that the company will wind up producing a series of quarterly earnings disappointments as it misses savings targets again and again.
A good time -- clearly not yet -- to buy the stock is when everybody has thrown up their hands at the halting nature of the company's progress. That is, if you think, that time-sensitive international shipments of goods will continue to grow in volume.
