Financial summary and brief description of a short-line railroad for sale.
The Business A two-mile short-line railroad located in the Southeast. The company derives 38% of its revenues from hauling freight in (leased) boxcars from its sole customer to a larger destination railroad. The remaining 62% of revenues are rents collected from other carriers that move the boxcars after they're off this railroad's tracks. The business's already prodigious margins (46% in 1991) grew even more when the owner upped the number of leased boxcars from 75 to 210, thus maximizing the very profitable rental income. Included in the sale are the two miles of track, a 50-ton GE Camelback engine, the engine house, and a 400,000-pound track scale.
Outlook As a result of deregulation in the early 1980s, large railroads were able to sell off unprofitable feeder lines, thus forming regional and short-line railroads. The number of short-line railroads has increased by 65% since 1978, and they seem to have done well; only 10 of the more than 240 short lines formed since 1986 have been liquidated. This particular railroad doesn't have much room for growth: its boxcars are in use 98% of the time, and it can't reasonably handle any more of them. So any future sales growth would have to come from inflationary rate increases. Attracting new business seems unlikely; there are no potential customers along the existing line.
* * *
Price Rationale Your average short line is about 49 miles long, or 25 times the size of this one. But valuation has little to do with the length of the line. Industry insiders expect prices to run at approximately 1.5 times revenues (projecting to $495,000 in this case), or 5 to 7 times earnings (projecting to as much as $1.4 million). Judging by the revenues, this line might seem overvalued. But it's the earnings that really matter here. The price of this business, which insiders consider quite reasonable, is based on the almost obscene profitability of the rental income.
* * *
Pros The profits. The seemingly attractive price. The profits. The chance to trade those childhood dreams of a Lionel train set for the real thing. And...did we mention the profits?
* * *
Cons If something happens to that single, solitary customer, or if it decides to use trucks instead of trains, you wouldn't see any of that rental income. (The cars have to be loaded to get onto the tracks and make money.) And a 100% decline in revenues would put the brakes on even these profit margins.
-- Christopher Caggiano
* * *
Inc. has no stake in the sale of the business featured. The magazine cannot confirm the accuracy of financial or other information offered by the seller. Inquiries should be directed to Geneva Business Services, in Irvine, Calif., 800-854-4643. n