The Railroad Week in Review:
Week ending November 25, 2000

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Thanksgiving Special: Two weeks ago when I compared railroad price/earnings ratios I used Calendar 2000 as the basis of comparison. The thought occurred that comparisons of present prices against estimated earnings for calendar 2001 might be more useful for a measure of potential investment value.

I've compared a dozen railroads - the six big class 1s plus FEC, KCS, and WC and including shortline companies Genesee & Wyoming, Providence & Worcester (PWX), and RailAmerica. Six metrics are used, and it's set up so the lowest number wins (a 1 means buy, a PE of 8 is better than a PE of 80, etc.). There is an Analysts' Rank, comprised of the Zacks rating as of November 14 weighted according to the number of analysts covering. For the quarter ending 12/31/00 I looked at the current estimates and the change over the past 90 days.

The percentage estimated growth rate YTY for this year and next create Price-Earnings/Growth (PEG) ratios, then it's done again to get Average Compound Growth for two years. The five-year earnings growth projection is then taken as a percent of the Zacks industry growth rate, 14.6%. Finally, I've created a weighted number to give the fewest points for the highest dividend payout.

On a strict numerical basis, they ranked lowest first RAIL, GNWR, and KCS. If your bent runs more to the Big Six class 1s, the order is CP, CN BNSF. Interestingly, BNSF is less than 2/10th a point behind CN, for all intents and purposes, a tie. The clear Number Three is Union Pacific.

The surprise was CP. I had suspected something was up when CEO Rob Ritchie and his lieutenants laid down some encouraging trends for the shortlines meeting in Calgary last month. Happily, CP Rail prints its own set of financial reports, and there is emerging a very strong story; more on that later. Combine the railroad operation with PanCanadian Petroleum and one gets a powerful player, and people are beginning to take notice.

Going back to 1996 the stock had been trading below 20 when it began a slow rise to around thirty, where it stayed until the end of 2Q98, except for a brief dip to 25 midwinter. Then it fell steadily back 20 or so and there it stayed until Mar 2000, albeit with a brief run to 25 mid-summer. At that point both CP and CN were off about 15% from where they had been in Nov. But then CP took off to the point CP is up more than 20% and CN is about back to zero. See attached chart.

The 3Q00 railroad financials for CPR compare quite favorably with its peers. I arbitrarily called the peer group BNSF, CN, and NS - the latter two due to revenue similarity as much as anything else, though Norfolk's merger-related slips kinda skew things. Be that as it may, CPR's operating ratio was 75.7 and net margin was 10.5% vs averages of 76.9 and 11.5% for the peer group.

It was in the debt ratios that CPR won hands-down. Debt/Market Cap 25.5%, debt/total cap 38.4%, and debt/equity 62.3%. Compare those low numbers with the peer group of 96.7%, 46.9%, and 96.4% respectively. Definitely something to watch.


--Roy Blanchard

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