THE BLANCHARD COMPANY

The Railroad Week in Review:
Week ending November 11, 2000

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As policy, notions of command and control are poisonous. As tools, they are broken. Command and control are met with hostility by intRA-networked knowledge workers and generate distrust in intER-networked markets. Cluetrain Clue No. 55.

This was not the week to be hanging around the NYSE looking for upward momentum. The DJIA dropped almost 500 points after a brush with the 11,000 mark on Monday, finishing the week down 200 BP. Some rails fared better, some worse. CN actually gained a couple of points. CSXT was down a percent. BNSF and KCS tied the Industrials and NS lost six bits, down 3%.

It's hard to say how much was election malaise and how much just following the herd. The fundamentals have not changed. However, it is intriguing to do some what-ifs on the Washington scene. This task is always best left to my fiend and colleague Frank Wilner, who writes the Rail Intelligence Newsletter. He senses the Republican majority in Congress will be so slim that committees where the GOP has one- or two-vote majorities may be tied, and changes in the congressional line-up could give shippers a greater voice.

"The result is what could be five votes for some version of a shipper bill on what may be a 20-member Commerce Committee. What's more - and this is crucial to those following the captive shipper debate - not a single shipper member will be gone from that committee," concludes Wilner. Seems to me railroad managers who continue to ignore shipper demands for better service and rates commensurate with the service actually provided have more at stake in DC than they do with their own Boards or institutional investors.

There's been a lot written about congestion, and one of the chief causes of congestion is terrible equipment utilization. Chemical shippers tell me they see just eight or nine turns a year on their lease fleet cars. Railroad-owned boxcars make maybe a dozen revenue trips a year. The odd thing about this is the worse service is, the more cars you need to serve the existing customer base. Yet to unclog the railroad you need fewer cars on the scene, not more.

This puts pressure on lessors and car builders to build market share, not just cars. Greenbrier Industries (NYSE: GBX) seems to be doing just that. Earnings for the fourth quarter exceeded analysts' earlier expectations by 50% and were at the upper end of the range of anticipated results recently announced by the company. There has been a 30% increase in its manufacturing backlog of new railcars to 7,800 cars valued at $440 million.

To put this in context, GBX points out that as of September 30, 2000, industry backlogs in North America were 26,000 railcars, down 30% from the 37,000 railcars at September 30, 1999. During this same time period, Greenbrier's North American backlog grew almost 50% to 6,100 units and market share has more than doubled to 23% from 11%.

Genesee & Wyoming (Nasdaq: GNWR) completed its previously announced investment in Empresa Ferroviaria Oriental, S.A. (Oriental'), a railroad connecting eastern Bolivia with Argentina and Brazil. GNWR gets a 22.6% equity interest in the Oriental, and it looks like it will be an excellent investment. For the nine months ended September 30, 2000, Oriental reported revenue of $23.6 million and earnings of $6.2 million under local accounting standards. Nice margins.

RailAmerica (Nasdaq: RAIL) won a slot on the Forbes 200 Best Small Companies List. Citing the company's "controlled expansion," Forbes noted, "As small companies grow, so does the tendency to add expertise and competitive advantage through acquisitions." The article went on to say that RAIL is half way to its goal of erasing $100 mm in debt this year and that sale of the Kalyn-Siebert specialty truck trailer maker could make up the rest.

This has truly been the year in which RAIL has accelerated the building of a core rail system on three continents. In Feb it acquired RailTex for $325 mm. In South America RAIL got its Chilean operation (Ferronor) hooked up with Belgrano Cargas S.A. of Argentina. Through service will run between Antofagasta on the Pacific Ocean and Salta, located on the eastern slopes of the Andes in Argentina. Principal commodities will be grain, mining materials and petroleum products.

These moves will more than triple annual sales. The acquisitions and the debt reduction have clearly helped the stock price. From a low of $5 a share last May it closed Friday at $7 and change. Rail is putting a healthy core of decent-performing shortlines in North America, getting rid of the less well performing properties, and sharpening the management team. Let's watch.

Wisconsin Central Stock (Nasdaq: WCLX) has had a rough go of it. And it isn't getting much better. On Monday CNET Investor downgraded WCLX to Reduce from Maintain. The argument runs parallel with what we're hearing from others: "Too many factors, which are outside WCLX's direct control, continue to cloud the earnings visibility of what otherwise remains an interesting portfolio of rail properties." The full value of the shares appears to be in the $14-$15 range. WCLX closed Friday at $14.31.

It's a fact of life that of more than 500 shortlines in the US some number will not survive unless saved by a change in public policy. The Texas Department of Transportation has filed to acquire and operate the 370-mile South Orient line between Presidio on the Rio Grande and San Angelo. According to my records, the line handles about 20,000 carloads a year, half the density one normally associates with even a marginally successful operation of this many miles.

The South Orient has been a hard-luck line all along. Back in August 1998 The San Angelo Standard reported that the operating company wanted to abandon but the DOT said it owned the line and did not want to abandon. Said the paper, "It is unlikely that line actually would be destroyed, but the company needs to have the abandonment approved in order to sell the lease and recoup some of the $9 million in losses it has suffered over the past seven years. According to State Comptroller Jim Sharp it makes no sense to eliminate a transportation corridor leading directly to the border even as we are discussing massive investments to ease the flow of traffic across the border." Fast forward to now and DOT expects to close the deal by year's end. Public policy has been served and a railroad has been saved.

Errata: The BNSF VP - Industrial Products Group is Dave Garin, not Dave Marin as reported here last week.

--Roy Blanchard


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