Coal is far and away the industry’s most important cargo; more than half of US power supply comes from coal, and rails carry virtually all the coal consumed in power plants.

Traditionally, most US coal production came from Appalachia for the majority of energy production, which was east of the Mississippi. Appalachia was a convenient local source.

But coal production from the region has been falling due to high mining costs and thinning seams. As the graph shows, production from the West has picked up; states such as Wyoming and Colorado are becoming the dominant coal suppliers. That’s a far more profitable route for the rails.

And then there’s ethanol. US ethanol consumption is up more than 75 percent since the beginning of 2004 and--supported by government mandates--is projected to grow by at least another 50 percent between now and 2012.

Grains are the second major cargo for the rails. Railroads haul the vast majority of corn from farms to ethanol production facilities. And ethanol is too corrosive to be transported by pipeline; it’s currently the fastest growing shipment for railroads.

Prime beneficiaries of these trends are companies that provide freight cars to haul all that coal, grain and ethanol.

We start with American Railcar Industries (NSDQ: ARII), which derives the majority of its revenue from building and selling two types of railcars: tank railcars and hopper cars. Tanker cars are used to haul liquid commodities, hopper cars are used to transport grain, cement and industrial materials.

Tanker cars represent American Railcar’s strongest and fastest growing business right now. Driven primarily by sales of ethanol tankers, deliveries of tanker cars soared to 547 in the final quarter of 2006, up more than 32 percent from the final quarter of 2005.

In addition to ethanol demand, there’s a strong replacement cycle underway in the tanker car business. Specifically, new government safety requirements are forcing shippers to upgrade and replace their older carriers with safer models.

And ethanol demand doesn’t just benefit the tanker car market. Hopper cars are used to transport corn to ethanol plants. And dried distiller’s grain, a by-product of ethanol production, is also typically transported in hopper cars for use as a base for animal feed. American Railcar Industries is a buy on this market that does give us a bit of growth while cutting us in on some of the profits in its dividend.

Then we have FreightCar America (NSDQ: RAIL), the leading manufacturer of coal cars in the US. In fact, the company manufactured more than 80 percent of the coal railcars delivered in North America since 2003; coal cars represent more than 90 percent of FreightCar’s annual production.

The coal car business has been booming amid strong demand for coal and the need to replace an aging fleet of older railcars. Newer aluminum railcars can carry the same loads but weigh a third less than traditional steel cars--translating to major fuel savings for the rails. Not surprising, FreightCar’s total car sales grew from less than 8,000 cars in 2004 to close to 19,000 last year.

Thanks to a warm start to the winter and falling coal demand, orders slowed notably late in 2006. However, FreightCar has a backlog of unfilled orders covering roughly six months of sales. And the weather is fickle--a late winter cold snap would rekindle demand for coal, and a hot summer would accelerate that trend. FreightCar America, which pays a quarterly dividend, rates a buy on the continued demand for new and replacement stock.

Its larger rival Trinity Industries (NYSE: TRN) manufactures both tanker cars and hopper cars. And unlike the other railcar builders, Trinity also has a major leasing operation.

Most railcars are actually owned by third-party leasing companies. These firms then rent those cars to operators under contracts for a fee. With a fleet of more than 85,000 railcars, Trinity is one of the largest railcar-leasing firms in the US.

And the business doesn’t stop at the rails. Trinity also builds hopper and tanker barges designed to transport liquids and grains via US inland waterways. With revenues up 19 percent in 2006 and the backlog of unfilled orders at an all-time record of 36,000 cars, Trinity’s business remains on solid footing. Trinity Industries is a buy for gains and a dividend stream.

Despite the slowing economy, container shipping ports on both coasts are running at close to full capacity. And all those containers shipped into US ports must ultimately be moved to retailers all across the US.

Greenbrier Companies (NYSE: GBX) is the largest manufacturer of intermodal railcars in the US. These carriers are designed to facilitate the transfer of container goods from truck to rail.

In addition, Greenbrier also manufactures smaller quantities of other types of railcars and manages 9,000 cars as part of its leasing operation.

Greenbrier has had some difficulties with production costs and management shake-ups; the CFO recently departed unexpectedly. Nonetheless, the backlog of unfilled orders remained solid at 14,700 at the end of 2006 and the company trades at just over 40 percent of sales, a big discount to larger rival Trinity. Buy Greenbrier Companies as a turnaround with a little dividend flow along the way.

Come and Chat

If you’d like to hear firsthand about some of our investments, particularly those in some of the more-interesting markets beyond the usual Wall Street fluff, join me on one or more of my upcoming conferences or travel opportunities--see below for the various opportunities available.

Head out to the East Coast, and join me and PF Associate Editors Roger Conrad and Elliott Gue at the Washington, DC, Money Show, September 6-8, 2007. The conference will take place at the Wardman Park Marriott, located in downtown Washington DC. Click here to register for free. Be sure to tell them I sent you.

Noble palaces, historic villages, stunning natural vistas and indispensable, one-on-one conversation: I’ll be cruising down the blue Danube Sept. 8-16, 2007, along with PF Associate Editors Roger Conrad and Elliott Gue. You’ll have unfettered access to talk about your portfolio or any other topic that comes up as you take in Central Europe’s rich culture and historic beauty aboard the River Cloud, a “five-star floating hotel.” Interested in exploring Europe and your portfolio? Contact Joseph H. Conlin Travel Management toll free at 877-814-6502 or via e-mail at nycimpresario@mac.com to finalize your plans.

Farewell

Finally, a man who set the stage for massive growth in late-night television programming died at 71 years.

Where would David Letterman, Charlie Rose and other favorites be without the man who really perfected the late-night interview, Tom Snyder?

A forerunner of many modern interviewers, Tom would engage some of the more newsworthy folks in a direct manner--all while puffing along on his signature cigarette.

If you’re interested in having me or one of my cohorts address any investment or professional groups, please e-mail me at bygeorge@kci-com.com with ideas or suggestions.

Neil J. George, Jr.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by e-mail at bygeorge@kci-com.com.