The Railroad Week in Review:
Week ending July 8, 2000

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Public Relations does not relate to the public. Companies are deeply afraid of their markets. Companies need to come down from their Ivory Towers and talk to the people with whom they hope to create relationships. Cluetrain Clues 25, 26.

WSJ Rail Editor Dan Machalaba set the tone for the week on Monday in a Heard on the Street by-line. He writes, "After several years of operational snafus and financial disappointments triggered by botched mergers, railroads are starting to put some of their worst problems behind them. Operations are starting to smooth out. For investors, the bottom line has been brutal. Since July 1997, the Standard & Poor's Rail Index, which consists of the major U.S. railroads, fell 42%, while the S&P 500-stock index soared 52%. Railroad stocks have recovered some lost ground recently: Since late March, the S&P Rail Index is down 1%, compared with a 5% decline for the S&P 500.

"For some investors, the most compelling case for the rail stocks is their price. How cheap are they? One way to look at the railroads is that their earnings growth rate easily matches or exceeds their current price/earnings ratios, which are at 10 times or less estimated 2001 per-share earnings. That ratio is less than half the market multiple for the S&P 500, which is about 22 times estimated 2001 earnings. In addition, stocks such as CSX and Norfolk Southern now offer annual yields of better than 5%, or quadruple that of the S&P 500."

Add to this the fact that the small railroads have even better growth prospects thanks to their focus on customer service and higher margin merchandise carloads, with little or no unit train or intermodal trade. Providence & Worcester (AMEX: PWX), Genesee & Wyoming (Nasdaq: GNWR) and Wisconsin Central (Nasdaq: WCLX) are all worth a good look for the very reasons Machalaba cites above.

Barron's reported this week that a potential drop in crude prices could be a good sign for the rails. Chart-watchers in particular sensed turnarounds in certain rail fortunes. BNI, CSX, and UNP all finished the week in positive territory relative to where they started out. BNI has finally broken north of its 200-day average, pushing $26, a spot not visited with any regularity since Jan.

UNP is also in the beginning stages of a rebound, closing the week at $40 and change. Recall UNP, like BNI, had begun a slide in Jan, however unlike BNI, had a recovery in March and then faltered in May. CSX dropped a sawbuck Jan-Feb and has remained at the $20 level since. This is the first glimmer or a turn, up a fiver in two weeks.

Of the lot of 'em only BNI has crossed the 200-day average into positive territory, which is in itself a good sign. It is also safe to say that among the US class 1s BNI is farthest along toward running a scheduled railroad. Moreover, BNI is the only railroad that has even approached using the Internet to cover the entire transaction spectrum from asking for the order to cash in hand. That says to me that BNI is about to make the concrete link between the Internet as communication tool and the scheduled railroad, leading to greater profitability. And the high-margin scheduled merchandise carload business will lead the charge.

A recent thread in WIR has been car management and movement information. A rail customer writes, "We need accurate and reliable car reporting. No holes or gaps. We don't need to wonder why a train that left Pensacola 4 days ago hasn't arrived in Baldwin yet. Obviously the train is someplace. We also need to have reporting for shortlines that is easy for the shortline to use and doesn't require a major investment or a computer guru to operate it.

"This is where the Internet is so perfect. The cost and use barriers are much lower. Imagine the conductor entering in the placement of the car on a wireless Internet hookup so everyone knows about it in real time. Life doesn't have to be so hard or filled with arcane computer barriers." Especially when companies like Oracle (Nasdaq: ORCL) and Sieble (Nasdaq: SEBL) have practically off-the shelf programs to take care of what has come to be called "Customer Relationship Management" or CRM.

It is becoming increasingly evident that customers are as concerned about the information regarding a shipment as they are about the goods themselves. Freight buyers will pay a trucker more per ton to move goods from A to B because, among other things, the information support is better. The beauty of the conductor input above is it puts responsibility for process information in the hands of the process-maker, not some intermediary a thousand miles away. Food for thought, for sure.

To be Up to Date in Kansas City one must know that effective July 12 Stilwell Financial (NYSE: SV - news) will replace Kansas City Southern Industries (NYSE: KSU - news) in the S&P 500 Index after the close of trading. That's the date Kansas City Southern Industries is spinning off Stilwell Financial to KSU shareholders.

Estimates of the split company are running in the $105-130 range, with the spread largely due to differences in valuation of the SV side. The railroad seems to be generally regarded as worth $6-8 per pre-reverse split share, based mainly on $600 mm in FY 2000 revenues and selling for about one times sales. Kansas City Southern closed the week at 89 13/16, just a couple of bucks short of its 12-month high set back in March.

Meanwhile, the Motley Fool Rule Breaker Portfolio, a collection of category killers like Intel, Pfizer, and Microsoft, has opened a dialog on whether to swap into SV from T. Rowe Price (Nasdaq: TROW). "The real concern is that TROW isn't the big dog in the big back yard of the mutual fund industry. That honor goes to Janus, the high-octane subsidiary of railroad company Kansas City Southern. Over the past year, Janus has been sucking up assets like a giant Hoover.

"As of the first quarter last year, T. Rowe Price had $149.2 billion in assets under management (AUM), and Janus had $136.8 billion. Since then, T. Rowe has grown the asset base to $185.2 billion, an excellent 24% growth rate. And Janus? It's grown AUM to $315.3 billion, meaning in one year Janus grew AUM nearly $179 billion, almost as much as T. Rowe Price accumulated in its entire history! That's a mind-blowing statistic. So, should we sell T. Rowe Price and buy shares of Kansas City Southern?" It's an intriguing argument, and you can follow the thread at if you like.

Shortline and logistics services provider Emons Transportation (Nasdaq: EMON) will be doubling the size of its intermodal terminal in Auburn, Maine. Beginning in October 1999 Zim Container Lines has steadily increased its container volumes, which Emons has forwarded inland over its St. Lawrence & Atlantic (SLR) subsidiary in conjunction with Canadian National.

An interesting twist is that certain steamship companies recently gave notice that they will be cutting back direct service to the Port of Boston. This will compel shippers to seek alternate ports and routes and positions SLR nicely in the international trade arena. The State of Maine will fund the expansion, which is estimated to cost approximately $1 mm and will use federal TEA-21 funds for 50% of the investment. In June 2000 the facility handled 1,350 containers, up from 900 containers in June '99.

Elsewhere, SLR is garnering kudos from RR Donnelley for its dedicated paper transload services. Just shows what a close alliance between a spin-off and the ex-parent (in this case CN) can do with some imagination and initiative.


--Roy Blanchard

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