The Railroad Week in Review:
Week ending June 3, 2000

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Companies that speak in the language of the pitch, the dog-and-pony show, are no longer speaking to anyone. Companies that assume online markets are the same markets that used to watch their ads on television are kidding themselves. (Cluetrain Clues 16 and 17)

This popped up on the Internet Thursday: “CIBC World Markets reiterates coverage of KSU at Strong Buy, price target $110." Could be. Zacks says eps for 2Q00 up 82% YTY, up 62% for 3Q00, up 74% for FY2000, up 17% for FY2001. Looks like something to buy for a year, ride it up, and exit after the split or wait for the RR to get bought.

Motley Fool contributor Brad Langner has taken a reasonable stab at putting a value on KSU and its parts. He writes, "With KSU trading at $67.25 [at the time of the note], I think it is worthwhile to try and value KSU to see if it is indeed selling at a discount. The following figures break out both the financial and transportation division of KSU.

“In valuing the financial division, I assumed that a valuation of 4% of assets under management as 4% is conservative when using industry comparables. For example, Pioneer group, a struggling management company, sold its business for 5% of assets. KSU's ownership is DST can be easily determined by DST's market valuation. See for the numbers.

“If you are long on KSU or a potential investor, the valuation could be extremely encouraging.”

S&P on the other hand isn't so sure. In their December 99 overview they wrote, "We doubt if the KSU financial services unit can sustain the 60% growth rate seen in 1999." They have a point. We all saw how it fell like a rock in concert with the Nasdaq downdraft. On the other hand, "Rail profits should advance on a 3% profit gain" thanks to the marketing alliance with CN, lower fuel costs, less congestion as trackwork is completed, and increased equity income from the Mexican rail operation.

Be Careful What You Ask For Department: Traffic World reports that “A railroad attempt to impose tariff surcharges on outbound shipments even though the railroad had a transportation contract with the receiver of the freight is an unreasonable practice.” So ruled the STB, making it clear once again for those who do not Get It that once you opt to be a contract carrier you’ve got to live up to your contract. Whether it’s a good bargain or not is immaterial. This goes to the continuing pricing conflict in an industry where service is rarely perceived as worth what is paid for it. Service quality is whatever the user - not the vendor -- perceives it to be. Customer perception drives acceptable rate levels and rate levels drive profitability.

Writing in, columnist Paul Elias remarks, “Four railroad companies vehemently fighting the proposed merger of two other rivals are attempting to derail the deal with a novel weapon: the Internet. The [Four Amigos] announced last week they would invest in, saying that the same efficiencies promised in a merger can be obtained through simple alliances. They will now use their investment and participation in Arzoon to lobby the board to nuke the [BNSF/CN] merger for good.”

Arzoon maintains it is not an auction or reverse auction site because there is no bidding. Customers say what they want shipped where and Arzoon software does the rest. Trouble is, that’s just not enough. JOC’s Larry Kaufman offers this observation: “Arzoon and initiatives like and constitute a good start. They improve the transaction process and presumably make it easier to do business with railroads. But they don't guarantee improved customer service or flawless interchange of freight.”

Which leads me back to, quoted at the top of WIR for the last month or so. The basic tenet its that markets are conversations, and that absent conversation fair transactions cannot take place. The beauty of the Internet is it lets you have those vital conversations quickly, easily, and unintrusively. Surprised and delighted customers are repeat customers, and it is the unstructured nature of the Internet that can help keep them that way. Moreover, since happy customers are invariably more profitable than unhappy ones, your investors will love you for it as well.

--Roy Blanchard

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