The Railroad Week in Review:
NS announced a $750 mm capital program for 2000, down from the $billion previously planned. Two thirds of it will go for roadway and infrastructure improvements with the balance toward locomotive upgrades, new multi-levels for auto service, and rehabbing coal, coke, and coil cars. In addition, NS will lease 150 new six-axle high-adhesion locomotives, still shying away from the AC power proving so popular elsewhere.
NS announces 4Q99 and year-end results on 1/26. Not too long ago Zacks had a current consensus eps estimate of 75 cents a share as I recall. Checking this morning Zacks shows "n/a" for the year and 14 cents for this quarter. The 1999 earnings record shows quarterly earnings of 30 cents, 20 cents, and a nickel. If the Zacks number is right it looks like 69 cents for the year vs. $1.65 in FY 1998, off 58%.
There are 381 mm shares outstanding so 69 cents for the year translates to net income of $262 mm. Dividends are paid at the rate of 80 cents a share for a $300 mm exposure. Add to that the capex and debt service and it's a very big number in deed. The question is thus how much will be covered by operating cash flow.
The latest shoe to drop in BNSF+CN was Tuesday's newspaper ad in the WSJ and elsewhere signed by the CEOs of CP, UP, NS, and CSX advising rail shippers to protest the merger to the STB. In response, the merging parties said simply, "BNSF and CN look forward to presenting our case before the STB. The Board's mandate is to protect the interests of shippers not competitors and we are confident it will follow that mandate. We urge shippers and everyone else with an interest to wait and see the facts before taking a position." Fair enough.
Recall last August Union Pacific most graciously invited me to attend their annual shortline meeting in Omaha (WIR 9/4/99). The highlight was a trainride over the new triple track segment between Gibbon and North Platte, NE, and now UP has sent a photograph which will let you see exactly how impressive this stretch of rail actually is. If you'll get out your track chart, go to MP 208. The train is a westbound merchandise train emerging from the interlocking which features moveable frog turnouts that allow moves in both directions to and from the middle track. That's US 30 paralleling on the left, should you wish to visit the site. Careful, though. Trains are spaced like rush hour on the Seventh Avenue IRT.
FEC Chairman Robert Anestis, in an interview with The Wall Street Transcript, talks about the future of his firm. The entire 3,300-word interview is available free online at http://www.twst.com/ceos.htm, and it's a worthwhile read. Anestis says, among other things, that his $1.6 billion (market cap) firm "is currently 54 percent owned by the St. Joe Company, but we're in the middle of a transaction in which St. Joe will spin off its interests in FECI. We want first to leverage our Florida Footprint assets and business plan to ensure that we go to market smoothly."
The RailAmerica/RTEX petition for exemption filed with the STB in November has been approved effective 1/14/2000. The Board received more than 100 letters of support from shippers, government entities, class I rails, and congress. Most important, the UTU wrote to say they had no objections. Meanwhile, RailAmerica reports it has secured $5.2 mm in new business for its Kalyn/Siebert trailer-manufacturing subsidiary. The sale of that unit announced in Nov appears to be still in the works. K/S contributed $40 mm in sales to the 1998 total of $77 mm and $7 mm of the total $13 mm ops income. Interestingly, its gross margin of 17% was less favorable than the rail operations.
Moody's December 1999 Railroad Industry Outlook notes that the class 1 railroads themselves own about half the total number of freight cars in service in North America and that number is expected to decline going forward. Which means shippers and shortlines will have to make up the difference. Carbuilding itself will probably slow considerably from the torrid 72,000 cars per year pace in 1999, running at 50K+ cars per year this year and next. TRN and GBX will continue to be the major plays here.
The NIT League's Conrail Transaction Council met in Philadelphia on Tuesday. Shippers and other interested parties filled to overflowing the large meeting room in the refurbished Reading RR Broad Street Terminal "head house," now part of the downtown Marriott. Henry Holcomb, writing in Wednesday's Philadelphia Inquirer, summed it up neatly: "About 300 angry shippers lined up at the Convention Center yesterday to protest the quality of rail service they said they have endured since Conrail was broken up seven months ago. There were complaints about hog farms coming within a day of running out of feed, plants that had to be shut down, and a persistent inability to get information that businesses need to plan."
The format of the meeting had presentations from CSX and NS on Their Story Thus Far, complete with STB Performance Measures and descriptions of new operating processes and practices designed to improve performance going forward. The audience by and large was unimpressed and underwhelmed. Causing particular ire was the fact that rate increases had been taken in lanes where service had deteriorated markedly. Asked when service would return to pre-Split levels, CSX said it would be fixed by March and NS provided a less definite time frame.
Next time the NIT League throws this particular bash I'd like to see shippers present first. It would be most instructive if rail customers were to use the STB's own Performance Measures applied to their actual movements. What was the average speed in miles per hour measured dock-to-dock for all cars in a month? What was the average yard dwell time in that month? What was the average number of cars each shipper actually had in transit (released, not yet placed, equivalent to the rails' Total Cars on Line)? Then let the railroads respond. That ought to cut to the chase.
Writing for the Wall Street Transcript Doug Rockel, Managing Director with ING Baring Furman Selz, says that the railroad industry "has not benefited from the booming economy because of the incredible amount of congestion that ensued in the years following the last round of railroad mergers. For example, if we were to look back at railroad car loadings, what one would see is a relatively flat comparison for industrywide traffic over the last two years."
Rockel says the rails have to improve earnings and efficiency, and that's going to take increased carload velocity and more dependable service. [Sound familiar?] He notes that "transit times or on-time service levels have dropped to as low as 40% in some cases, 60% in other cases. Those numbers should be compared to previous standards that were in the high 80s, low 90% range." But there is hope, he says. "Certainly we still see merger opportunities in the short line part of the rail sector. There are still a few regional railroads where there ultimately I think will come additional consolidation." He cites GNWR and RAIL+RTEX as particularly strong players.
Weekly carloadings and trendlines are available at www.transmatch.com >> Railfax. The source is the Thursday AAR figures and they show both carload and intermodal loadings. Merchandise carloadings are further broken down by commodity. Market shares are calculated as total handlings by carrier divided by total U.S. originated rail traffic, so it's not a transportation market share as much as it is a railroad share.
A new feature at this site is the RailMatch equipment trading floor. It's a given that shippers -- in the east at least -- are scrambling for cars and adding to fleets as a result of service slowdowns. At the NIT League Conrail Transaction Council meeting in Phila this week several shippers they were adding to fleets. They would do well to post their needs here, as would parties with cars to place.
One of the most attractive features of e-commerce is its ability to create a liquid market among many buyers and sellers in place of the old phone-and-Rolodex system of finding and placing equipment. RailMatch has asked me to be the "market maker" for shortline car supply, and I would invite readers of this letter (shortline or not) to let me know what's needed or available. I'll have it posted to the site and waive the membership fee for the initial listing. (Brokers and vendors please note: RailMatch in no way takes away from the important service you offer. Instead it adds reach and frequency to your listings and expands your sources.)
Finally, and still on the subject of e-commerce, you can read a paper on that topic by noted independent Wall Street rail analyst Tony Hatch. In it he asks, "How is e-commerce changing the very way that customers will do business in the future, and what are the ramifications for rail carriers?" A prescient read.
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