January 14, 2022

Summary

We have calculated the DMIᵀᴹ Index for key Class I railroads in the United States. Class I railroads are major rail carriers based on annual revenues as defined by the United States Surface Transportation Board. The DMI’s Index for the companies are in the range of 0.92% to 2.22%. 

The DMI Index calculation is based exclusively on Precision Scheduled Railroading (PSR) data. According to Wikipedia, PSR is a concept in freight railroad operations pioneered by E. Hunter Harrison in 1993, and adopted by every North American Class I railroad since. It shifts the focus from older practices, such as unit trains, hub and spoke operations and individual car switching at hump yards, to emphasize point-to-point freight car movements on simplified routing networks. Under PSR, freight trains operate on fixed schedules, much like passenger trains, instead of being dispatched whenever a sufficient number of loaded cars are available. Inventories of freight cars and locomotives are reduced and fewer workers are employed for a given level of traffic. The result is often substantial improvement in railroad operating ratios.

A higher DMI Index is generally preferable across companies and industries. By way of reference, internet companies have a higher DMI Index because most of their enterprise value is derived from data. For example, Google’s DMI Index is 93 percent as we will discuss in a later blog.

Definitions

• DMIᵀᴹ Index = Data Valuation / Enterprise Value
• Data Valuation = PSR Data Valuation + Equipment Data Valuation + Sensor Data Valuation + Real Estate Data Valuation + Other Asset Valuation 

• Enterprise Value =  Equity Value + Long Term Debt – Cash, a key metric used in the investment community

Methodology

The YDC team recently published a DMI Index for major Railroad companies in the United States. Here is an example for Union Pacific Corporation along with a benchmark that includes other railroad companies.

The data valuation is based on the latest available trends on operating ratios and other financial information. The total value of data will likely be higher once additional datasets relating to equipment, sensors and real estate are included. We have estimated the Enterprise Value of BNSF Railway (wholly-owned by Berkshire Hathaway) based on comparable earnings multiples for other railroads.