Tuesday, March 20, 2007

Calls of Note Part 5

- BB&T Capital Markets is out with an interesting call on Railroads noting that the "rail renaissance" has been very good to railroads and railroad investors in recent years. However, railroad management teams are seemingly running the businesses for their debt holders and credit rating agencies (i.e. focusing on repaying debt and maintaining investment grade credit ratings), and the firm believes many equity investors are simply fed up. Shareholders want their money, and they want it now. They want bigger dividends. They want bigger share repurchases. They simply want to get paid. So it's time to send a loud and clear message to the market, and in firm's view there is no better way than a material stock repurchase. But they don't mean over the next few years, per the current authorizations, they mean today. BB&T believes the rails can afford it, so it's time to pay up.

Dividends and share repurchase authorizations are increasing, to be sure, but why wait to buy the stock? Instead of buying stock over the course of years, why not go the market immediately with a tender offer for the entire repurchase authorization? The firm believes that if the Class I rails levered up to the 50% debt-to-cap level, they could use the cash to repurchase from 10%-31% of their shares outstanding, which could add 5%-17% to 2007 EPS. Bottom-line: if your stock is such a great value, buy it aggressively. And buy it now, not "opportunistically" over time. If that requires levering up a bit, then so be it. They believe the end result would be accretive to EPS, and likely applauded by the market.

Buy the stocks, and buy them now. That's BB&T's message to investors and railroad management teams. It's easy to tell investors that your stock is undervalued and your outlook is solid, but it's another thing altogether to step up and buy back 10%+ of your shares outstanding. That's how you send the right message to shareholders, and that's exactly what they think the Class I rails in their coverage universe should do. Firm remain bullish on their railroad coverage universe, and continues to recommend Buy rated names: BNI, CNI, CSX, GWR, NSC, and UNP.

Notablecalls: BB&T's John L. Barnes III sure comes across as a strongly opinionated fellow. The rails have been acting pretty OK lately so would not be surprised to see some further buy interest in select names.

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