High-Speed Rail Investing

Some call it a boondoggle; some call it necessary for infrastructure development.

Whatever you call it, high-speed rail construction officially launched this month.

As a result, we’re looking to make a few bucks off the companies that’ll get the lion’s share of high-speed rail contracts.

I’ll tell you about a few of the companies I like in this space in just a moment — but first, let’s take a closer look at a couple of events that unfolded over the last two weeks that now have high-speed rail enthusiasts all kinds of giddy…

The Largest Untapped Rail Market in the World

After a series of changes were made to ensure California’s high-speed rail system wouldn’t break the bank, the Federal Railroad Administration approved the construction of the first phase of the project: a 65-mile span from Merced to Fresno.

Construction is set to begin next year, though some critics remain unconvinced that funding for the $68 billion endeavor is certain — clearly a valid concern if all funding is expected to come from the state.

But that may not end up being the case…

While California has issued $2.6 billion in state bonds and has received $3.2 billion in additional federal funds for track construction, I anticipate 2013 will open the door for private sector involvement.

And this will go beyond just the California high-speed rail line.

Here’s the deal…

Set aside California’s high-speed rail system for a moment and take a look at Amtrak.

Aside from the Northeast Corridor, it’s just not profitable.

And let’s face it; this is something the government doesn’t really have the capacity to fix. I would actually argue it’s the government that’s responsible for the inefficiencies keeping Amtrak from being profitable (again, outside the Northeast Corridor).

So it was no surprise when the International Business Times reported that there are now a number of U.S. venture firms — including the Carlyle Group — as well as some foreign companies from India, France, and China looking to pony up to get a piece of this action.

The article went on to read:

The China Investment Corporation, a sovereign wealth fund and China Construction America, a subsidiary of China’s State Construction Engineering Corporation, have expressed interest in putting money into U.S. infrastructure projects, including rail.

China Investment Corp, with total assets in excess of $400 billion as of 2010, has talked to California politicians about investing in the California high-speed rail project, which is scheduled to link LA and San Francisco by 2033.

“The Chinese are extremely interested in the U.S.,” Christopher Barkan, director of the Rail Transportation and Engineering Center at the University of Illinois said. “We’re the largest untapped market for high-speed rail in the world.”

I think there’s a lot of opportunity here. And I’m cautiously optimistic that at some point before the end of this decade, we’re going to see a significant amount of private capital come into the high-speed rail space.

In Japan, Korea, and throughout Europe, high-speed rail has proven to be profitable.

All of these systems eventually incorporated some form of public-private partnerships where the private sector was embraced, not ignored.

$2.6 Trillion in Economic Activity

As I mentioned, the Northeast Corridor is the only place you’ll find profitability in this space, and that really has more to do with commuter necessity than anything else.

Every year, the Northeast Corridor provides service for 13 million Amtrak passengers and 200 million commuters.

Interestingly, this 457-mile line runs through 11 mega-regions that only encompass 2% of the country’s land mass —yet this area is the densest and most economically productive. It accounts for about $2.6 trillion in economic activity.

So while there are certainly benefits to the California high-speed rail line, integrating high-speed systems on the Northeast Corridor is the real priority for a lot of folks.

Today Amtrak is looking to have a high-speed rail system fully integrated and operational by 2040.

The plan calls for 220 mph trains running from Maine to Virginia, although it’s the span between New York and D.C. where you’ll find the heaviest traffic.

As a side note: When completed, a high-speed rail line running from New York to D.C. will take your travel time from two hours and 45 minutes to just over 90 minutes.

The plan is expected to cost $151 billion.

To be honest, I just don’t see it happening without the private sector…

In fact, because the potential profitability from these new high-speed rail systems is so staggering (we’re talking billions of dollars a year in direct and indirect revenue streams), I don’t think it’ll be much longer before a round of hefty campaign contributions results in Washington warming up to the idea.

In the meantime, high-speed development along the Northeast Corridor continues to move forward, albeit at a snail’s pace…

The most recent news came out of Baltimore last week, where we got word that Amtrak began testing a 165 mph run in four stretches of rail between Maryland and Massachusetts. The testing is required in order for Amtrak to raise its top speed limits.

If high-speed rail wasn’t being taken seriously in Washington or in the private sector, you can bet nobody would pony up the testing capital or spend the time running these tests.

High-speed rail is coming, my friends.

And I have no doubt we’re going to be able to profit along the way…

Some of the companies that are likely to benefit from high-speed rail development in the U.S. include Siemens (NYSE: SI), Bombardier (TSX: BBD-A), and Timken (NYSE: TKR)… and there are definitely more to come.

Stay tuned as we continue to provide investment insight on the development of high-speed rail here in North America.

To a new way of life and a new generation of wealth…

Jeff Siegel Signature