The Railroad Week in
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To traditional corporations, networked conversations may appear confused, may sound confusing. But networks are organizing faster than they are. Networks have better tools, more new ideas, no rules to slow them down, and are waking up and linking to each other. Watching. Not waiting. Cluetrain Clues 94, 95.
Union Pacific (NYSE: UNP) checked in with an earnings warning Thursday: 87 to 90 cents a share, down from the consensus 93 cents the day before, off 5.4% to the mid-point, and off 7% from 4Q99’s 95 cents a share. Hardly the hit taken by Norfolk Southern (NYSE: NSC) last week, down by 50% or more.
UNP will shed about 2,000 jobs -- 4% of its workforce – in the first half of 2001. The slowing economy means slowing sales while the high fuel costs continue to hammer the OR where they have yet to be factored into rate increases. Making matters worse is Old Man Winter acting up in the northern plains where so much of the core railroad is located.
Capex will take a small hit, slowing to something less than the $2 bn figure attained in FY 2000. For the year, The consensus is now in the $4 range, down 15% from the prior consensus of $4.68. And to think UNP hit its 52-week high of $52 3/8 just before the close Wednesday, only to shed the two bucks Thursday.
It is worthwhile to note that both UNP and NSC are major players in the automotive market. The problems at Daimler-Chrysler and GM gave some a head-up, though for the year UNP expects the auto biz increase to be in excess of 10%. For the quarter and into next year the prospects for coal are brightening, thanks both to that same Old Man Winter and to dwindling stockpiles, much as reported by NSC.
More important, UNP said in a press release, "Fourth quarter carloadings are expected to rise by only one percent over a year ago." Only one percent? Considering what we’re seeing elsewhere, it’s not really all that bad. CNI is the only other gainer in 4QTD, up 2.2%, while everybody else but NSC is down a point or better (NSC off 0.8%).
So where do we go from here? At $4 a share and today’s 10x railroad multiple UNP would seem to be fairly priced, if a bit rich. However, three years ago UNP sold for $62 5/8 on fully diluted earnings of $1.74 per share, a heady 36x. By comparison CSX earned $3.72 fully diluted and sold for $54 – 14.5 times earnings -- at the end of 1997. At that time NSC earned $1.90 fully diluted and sold for $30 ˝, or 16 times earnings.
Zacks says UNP is expected to grow earnings at a rate of 11.7% a year for the next five years. That puts UNP making $5 a share by the end of 2002 driving a share price of $75 a share assuming a climb back to 15 times earnings. At this price and earnings level the PEG ratio is 123 (fair value is 100) and represents a slight premium, however not out of line.
A market basket of equal dollar amounts of all 13 rail stocks from Burlington Northern Santa Fe (NYSE: BNI) to Wisconsin Central (Nasdaq: WCLX) closed the year up 3%. Winners were Genesee & Wyoming (Nasdaq: GNWR) and Kansas City Southern (NYSE: KSU), both doubles, with CP up nearly 40%. Losers were NSC (down a third to $13 and change), CSX and Florida East Coast (both off 17%). See charts following for details (courtesy myschwab.com)
Looking ahead, the winners will be those companies best able to match actual performance to customer supply chain management requirements. Doing so means being able to charge premium rates so that operating models are driven by potential revenue capture. That means scheduled operations which in turn will cut per-unit costs for everything from car hire to crew-starts. One need look no further than the CNI results for 3Q00 to see how scheduling can drive earnings up and the OR down even in the face of 50% higher fuel costs.
RailAmerica (Nasdaq: RAIL) has taken a couple more steps forward in its march to reduce debt and focus on the core railroad business. Just this week RAIL closed on the $7.7 mm sale of its Pittsburgh Industrial railroad (PIR) to the Ohio Central, a privately held shortline operator based in Coshocton, Ohio. PIR was a 42-mile property acquired as part of the RailTex transaction. My records show PIR averages about 6,000 cars per year, just missing the 100-carload per mile per year shortline profitability benchmark (see www.rblanchard.com) It was originally acquired from Conrail in December 1996. In a press release RAIL said, "PIR was had been identified as a non-strategic railroad in connection with the Company's strategy to increase equity and reduce long-term debt."
Also this week, RAIL picked up another $11.4 mm by selling its 26% equity in Quebec Railway Corp. (QRC), the Canadian-based Ontario L'Orignal Railway (OLOR), and certain other real estate and rail assets. QRC is a Montreal-based railroad holding company that operates five short line railroads covering approximately 740 miles in southeastern Canada. RailAmerica acquired its minority equity interest in QRC through its acquisition of Canada’s RaiLink Ltd. in July 1999. OLOR is a 26-mile former RTEX line originally acquired from CNI in November 1996. The other properties sold include non-operating or redundant real estate and rail assets.
One way to reduce balance sheet leverage (assets/equity) is to reduce the asset base. RAIL has written off $22.2 mm worth of locomotives and leased them back through four separate financial institutions. The transactions are part of the Company's plan to do about $130 mm in rolling stock sale/leasebacks by the end of 1Q01. Proceeds will reduce senior debt and the goal is to trim long-term debt to less than $350 mm by March 31, 2001.
Finally, RAIL closed on the sale of its specialty truck trailer manufacturing subsidiary, Trois-Rivieres Trailers, Inc. (formerly Kalyn/Siebert Canada/Fabrex) for approximately $6 mm. At the same time RAIL is liquidating some $3 mm in other assets of Trois-Rivieres Trailers. Completion of these transactions knocks $116 mm off the RAIL debt load, a nice bump to the original $100 mm target set in Jan 2000.
This could be worth nearly a $million a month in reduced interest charges. RAIL interest payments are running around $50 mm a year based on an annualized nine-month interest figure from the most recent 10-Q. Given the sale prices above, it is doubtful the rail properties were generating anything like this much money at the end of the day. Excellent move.
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