In these choppy markets, we are seeing some real strength, as I've written several times here , in agriculture and mining. Now you know that getting coal, steel and grain from one end of the country to the other is the work of our awesome national rail and trucking system.
But the role of our inland and coastal waterways is much underappreciated. So today I suggest that you take quick look at little-known Kirby ( KEX), which operates the largest U.S. fleet of inland tank barges and towing vessels. Kirby's market share and economies of scale absolutely dwarf its closest peers. The company has two main segments: Inland Marine Transportation and Engine Systems. So beyond transporting bulk liquid products throughout the Mississippi River System and the Gulf Intracoastal Waterways, the company also overhauls and services medium- and high-speed diesel engines for marine, power-generation and railroad applications. Kirby's strong recent growth depends on the framework of the U.S. heartland. There are simply few substitutes to river barge transportation for many of the petrochemical facilities, and much-faster shipping by truck or rail is just too expensive. Consider that a barge can transport a ton of cargo 522 miles on one gallon of fuel, while a train can haul a ton only 403 miles for the same amount of fuel and a truck can only take it 80 miles. This gives the few companies that operate barges throughout the Mississippi River System's inland waterways a cut at a market with highly inelastic pricing. With control of a third of the tank barges that travel on U.S. waterways -- about twice as many as the next largest operator -- Kirby's scale sets it apart from its peers and allows the company to offer quicker service to more customers. High demand for oil and chemicals in the last year has only fueled the imbalance of supply and demand for tanker barges, and Kirby has translated the quick turnaround of its vessels into asset utilization rates that almost reach 100%. Only hurricanes and seasonal weather have slowed its inland fleet of 904 tank barges and 241 towing vessels from transporting petrochemicals, pressurized products, black oil, refined petroleum and agricultural chemical products throughout the Mississippi River System and Gulf Coast. The company's diesel engine services segment accounts for about a quarter of its total revenues, and acquisitions over the past year have helped it boost profits to record levels. The division's original focus was overhauling and servicing medium-speed diesel engines, which are often used to power large electrical generators and ships. It has recently expanded its operations, though, to sell more diesel engine parts and service high-speed diesel engines. And the three acquisitions that the company made in 2007 boosted its business in high-speed rail engine services and power generation. Shares of the Houston-based company have rallied sharply in the face of the broader market declines of the last month, posting a 32% gain since they bottomed out in early January. Buyers kept shares marching higher after management said that earnings would exceed projections just weeks before it reported results. And exceed optimistic expectations is exactly what they did. Kirby said that net earnings for the fourth quarter rose 47% from the same quarter a year ago, to $34.4 million from $23.4 million, and revenue was up 22% over the same period. Earnings per share of 64 cents beat the Street's consensus range of 57 cents to 62 cents per share with unexpected ease. The up quarter was the sixteenth straight for Kirby, and the fundamentals of both of its segments make similar future results look very likely, as guidance from this normally conservative outfit was unusually positive. In summary, barges might not generate the excitement of the brokerage business or tech, but they do produce a steady income even during soft spots in the economy. Kirby shares almost doubled during the 2001 recession, after all, rising from around $8.50 to $16.50. Lift that bale.
Trust No One Who Makes More Than $30M
Stocks began this post-holiday week with a surge of more than 150 points on the strength of misplaced optimism about the potential for a recovery in U.S. retail stocks and European banks. Then the market trickled down over the course of next few hours and closed down for the day. Then on Wednesday it finally dawned on folks that it's pretty hard to get hard-earned money moving into paper assets when risk aversion is the byword of the day, not to mention the month and the year.
Credit the souring mood this time to Credit Suisse ( CS), one of the bluest of the blue-chip European banking stocks, which reported a massive loss due to what it called "mismarking and pricing errors" by its bond traders. They may call it fraud or a boo-boo, but figure it's just their pained way of saying that they have been snared in the subprime debt-related liquidity mess, just like all of their more plebian rivals. Meanwhile, Lehman Brothers ( LEH) this week also put one foot outside of the closet today, as The Wall Street Journal reported that it is likely to reverse its prior tactic of denial and soon report a rocky quarter due to mismanaged bets on commercial real estate loans and residential mortgages. I seem to remember that back around 10 months ago, Lehman, Bear Stearns ( BSC) and Merrill Lynch ( MER) all said that while they had done a little business in mortgages, they were unlikely to even record much of a slowdown, much less losses. What a difference a year makes. It just goes to show that it's really hard to believe corporate leaders sometimes. It's not that they lie, which they do, it's that they are eternal optimists who never think anything bad will happen to them. I'm all for optimism, but there must be more to it than just a hope and a wink. Much of the business model that brokers relied upon for profit growth over the past five years has gone away, and it is not coming back. All those fancy debt instruments that were created -- the collateralized debt obligations, structured investment vehicles, variable-rate debt obligations, credit default swaps, etc. -- generated fees that were very high-margin and went virtually straight to the bottom line. To the extent that there are no more suckers to whom these things can be sold, the financial services industry will have to retrench, cut expenses, fire people and go back to their basic business. While there is nothing wrong with straightforward commercial lending and trading, they're slow-growth businesses now under the cloud of impending recession. Moreover, as the brokers scramble to fill the holes in their capital requirements left by multibillion-dollar losses, they are going to have to hoard as much money as possible -- and that means fewer high-margin loans to hedge funds and other customers. As a result, I don't expect a lasting recovery in the brokers anytime soon, as their real fundamentals are deteriorating just as briskly as their valuations.