THE BLANCHARD COMPANY

The Railroad Week in Review:
Week ending April 15, 2000

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"Markets consist of human beings, not demographic sectors." Thesis Number 2, www.cluetrain.com

It was human beings, not market sectors that set markets on a dizzying downward spiral Friday. According to the Philadelphia Inquirer, this was in percentage terms the worst week ever for the Nasdaq but only the 236th worst for the Dow. The day's moves were the second worst for the Naz and only the 40th worst for the Dow.

I really think the big driver of this downward move was the confluence of a number of events. One, there remains continuing uncertainty as to how far the Fed will go in its next rate hike. Two, it's earnings season and it's anybody's guess as to how the market will react to news of any kind. Three, the day-traders have gotten badly beat up and will have to take time off to lick their wounds.

Four, it's tax time and some that did well are selling to pay Caesar. Five, it's margin call, dearest. Think that's a minor issue? Think again. The Economist reports that just since October Our Fellow Amurricans have increased margin debt by more than 50%. Perhaps a little refresher on how hard margin calls hit is in order.

Bill Mann, writing for The Motley Fool Friday evening, puts it this way: "Let's say, for example, as of March 10 our fictitious investor Moe Aggressive had a portfolio consisting of $40,000 in Nasdaq 100 Trust (Amex: QQQ) and bought another $10,000 of VerticalNet (Nasdaq: VERT) on margin. The net value of his account would be $30,000 ($40K-10K of debt), and his margin level would be 25%.

"In the interim, the QQQ price has dropped by 27%, so his holding is now worth $29,200. VerticalNet, meanwhile, has dropped 82%, from $148 down to a current level of $28. The asset bought by Moe's $10,000 margin is now worth $1891. But Moe's margin level remains at $10,000, and that's what he still owes. Unfortunately, his current account balance of $19,200 fails the broker's limit for margin, so he gets hit with a margin call.

"He can sell the VerticalNet, but that would still leave $8200 in debt. To cover, he has to sell some of his other stock. To be precise, he must sell 29% of his QQQ to rid himself of the debt. This leaves him at a final market value of $21,000, down from $50,000, with no chance of recoup either the sold QQQ shares or the VerticalNet."

Those clever to keep some money in rails didnít fare nearly as bad as the dot-com crowd in the recent rout. For the week NSC took the honors, up nearly 5% followed by CNI up about 2%. CSX took the low spot, following the DJIA down 7%. All the rest stayed even. Among the non-class 1 carriers, GNWR and WCLX both shed about 200 basis points while RAIL sustained a steady decline closing at $5.75, off 10%. Of the lot, maybe three worth a serious look. But more on that next week.

A little-known fact is that the Dakota Minnesota & Eastern (DME) regional railroad has significant backing from Pittsburgh-based track material supplier L. B. Foster (Nasdaq: FSTRA). According to Foster's 10K, "At 12/31/98 the Company's investment was recorded at its historical cost of $1.7 mm. On January 13, 1999, the Company increased its investment in the DM&E by acquiring $6 mm of DM&E Series C Preferred Stock and warrants. On a fully diluted basis, the Company owns approximately 16% of the DM&E's common stock.

"Although the market value of the DM&E is not readily determinable, management believes that this investment, regardless of the DM&Eís Powder River Basin project, is worth significantly more than its historical cost. [With respect to PRB] if the Project proves to be viable, management believes that the value of the Companyís investment in the DM&E could increase dramatically." Viability is defined as capturing 5% market share in the PRB. Both UNP and BNI may have other thoughts.

In case you missed it (I did), NS filed an 8-K with the SEC on 4/3/200 to record a one-time workforce reduction charge in first quarter 2000, currently estimated to be $100 million, equal to approximately 16 cents per diluted share. The purpose was to recognize the cost of its voluntary early retirement program and other adjustments that more nearly match workforce size to business needs.

Let's see what that means. Current consensus estimate for 1Q00 is eight cents, down from 20 cents three months ago, a drop of 12 cents. Now the analysts who arrive at these numbers don't live in a vacuum, and they knew about the buyouts, because NSC Chairman David Goode specifically mentioned it in the 1/26/2000 quarterly presentation. So the 16 cents is probably already factored in. But please note the estimates did not drop the full 16 cents.

Earnings date will be on or about 4/26. Then we'll see how good the eight cents is. Personally, I'm looking for the FY2000 estimates to stop dropping about then. FWIW, NS said that some 900 souls participated on the buyout. . Do the math: $100 mm divided by 900 is $100K and change each. Benefits under the program will be paid principally from the over-funded portion of the Corporation's pension plan.

Ron Conway, John Sammon, and Gary Spiegel have all left CSX as result of a shift in management assignments. Michael Giftos becomes executive vice president and chief commercial officer, and Michael Ward becomes executive vice president-operations. New names and assignments are as follows:

Commercial (Giftos reports) ∑

  • William J. Flynn, senior vice president-Merchandise Service Group.
  • Clarence W. Gooden, senior vice president-Coal Service Group.
  • Dale R. Hawk continues in his role as senior vice president-Automotive Service Group.
  • Christopher P. Jenkins, vice president-sales and marketing.

Operations (Ward and Crown reports)

  • W. Michael Cantrell, senior vice president-mechanical and engineering (Ward)
  • Alan F. Crown, senior vice president-transportation(Ward)
  • James W. Fallon, vice president-network operations (Crown)
  • Gerald T. Gates, vice president-Central Region (Crown)

CSXT created three service groups last year, in addition to the existing CSX Intermodal unit that is led by Les Passa. Service groups focus more closely on customers' distinct needs to enable the company to meet revenue growth goals. Each service group has profit-and- loss targets and incorporates functions critical to customer growth and success such as customer service, service design, car management and billing.

Other senior executives who will continue to play key roles in the Operating Department include Ed Codd, vice president-risk management; Bob Downing, vice president-Northeast Region; Frank Pursley, vice president-service design; and Mike Pendergrass, vice president-Southern Region. Rounding out the team are Mike Peterson, vice president-Western Region; Tom Schmidt, vice president-engineering; Jim Schultz, vice president-safety and chief safety officer; and John Williams, vice president-Midwest Region.

In his remarks on the changes, CSX Chairman John Snow said, "CSX has a terrific opportunity to grow earnings substantially. Our job now is to sharply focus the entire organization on the overriding goal of enhancing shareholder value by stepping up the pace of operations, making this the safest railroad possible and bringing customers the level of rail service they want and need. We've done that before, and now is the time to do it again." It's a powerful lineup, to be sure.

--Roy Blanchard


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