The Blanchard Company

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The Railroad Week in Review 4/12/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

The past week's market downturn wiped out the entire year's gains for the S&P 500. The rails have not done any better. In fact, a market basket of $2,000 invested in each of 18 rails Jan 1 is now off nearly $700, or 1.9%. The good news is that of the 18 starters, only four have actually lost ground. In order of loss, they are BNSF, down 16%, WC off 11%, and UP dropping 5%. Toss in Pioneer off a whopping 42% and you can see how penny stocks skew averages -- its drop was to $1.75 from $2.50.

In my opinion, the BNSF could be the best bargain out there. First Call calls for 1998 earnings of $7.54 on an average forward five-year growth rate of 15%. (the $1.20 dividend adds another 1.7% per year). Make that growth rate (pre-dividends) your long-term PE, multiply it by the 1998 estimate, and voila. your target price of $113. Friday's closing price of $72 3/8 is 64% of the target, so -- assuming BNSF achieves that price by 12/98 -- folks who get in today will make about 16% compound annual growth on their money. Run the exercise on the others and you may find similar opportunities.

The big news of the week concerned the NS-CSX agreement on Conrail. We've known all along it was essentially a split along the lines of former NYC to CSX (shades of Robert R. Young in the '50s!) and everything else to NS (it was PRR control of N&W -- Pocahontas coal linked with northeast merchandise -- the drove Young's proposal). Now comes the fine-tuning. There's an excellent map on the NS website ( or you can link to it from my own site (

Excerpts of the Press release: "Under the plan, Norfolk Southern and CSX will divide all of Conrail's principal routes, which form an "X" crossing in Ohio, with each railroad operating two of the four legs of the "X". Norfolk Southern will obtain about 58 percent of ConraiI and CSX about 42 percent, based on the revenues generated by Conrail's lines and facilities in 1995.

"In addition, CSX will operate Conrail's line connecting New York and Philadelphia (a former Reading line) and the line that connects Crestline, Ohio and Chicago, a portion of which west of Fort Wayne, Ind., now is owned by Norfolk Southern. And Norfolk Southern will operate the Conrail line serving the metropolitan New York area between northern New Jersey and Buffalo through Binghamton, N.Y., (former Erie Lackawanna) and another between Buffalo and Harrisburg, Pa. Norfolk Southern will operate most Conrail lines in Michigan, Maryland, Delaware and Pennsylvania. It also will operate the routes between Toledo and Detroit, Columbus and Cincinnati and between Columbus and Charleston, W. Va.

"Norfolk Southern and CSX jointly will operate Conrail assets in major terminal areas such as Detroit and northern and southern New Jersey. The two companies also will share access to certain lines in Philadelphia and Indianapolis, and to the rail lines serving the Monongahela coal fields in southwestern Pennsylvania.

"The joint STB application will address traffic flows, terminal operations and related matters; outline the capital investments each company plans to make in new connections and facilities and to increase capacity on critical routes; and detail operating savings and other public benefits resulting from the transaction. Norfolk Southern and CSX will jointly solve the few "2-to-1" points created by their division of Conrail."

Maps detailing the joint service areas are available for review by interested parties. Shortlines should contact their NS representatives; customer requests will be handled through the NS sales force and governmental agencies may contact Jim Granum, Norfolk's VP for Public Affairs In Washington.

Canadian National has come forward in this the eleventh hour of the merger process to suggest that the proposed division of Conrail falls short. The CN website ( has position papers on CN's proposal for winning back traffic from the trucking industry, press releases on the hows and whys of shipper benefits of a "continental rail network," and why CN stresses the need for competitive rail access to the northeastern United States. Maps are provided.

According to press releases, CN and its alliance partners NYSW, B&P, NY & Atlantic ) former LIRR freight, now Anacostia & Pacific) assert "the dismemberment of Conrail contemplated by Norfolk Southern and CSX puts at risk two New York State rail lines -- the Montreal/Syracuse or "Massena" route and Southern Tier line linking the New York City area and Buffalo though upstate New York. Both lines are thinly-trafficked and are unlikely to draw sustained new investment by either CSX or Norfolk Southern. This would undermine the lines' viability and threaten shippers and rail employees alike.

"Canadian freight now moving over the Massena line generates two trains daily and accounts for 80% of the route's traffic base. [There is a] concern is that southern-U.S.-based CSX and Norfolk Southern will also devise rates favoring goods and commodities sourced in the U.S. Southeast, thereby limiting New York State corporations' access to alternative supplies of competing goods in regions west and north of the state's boundaries."

What CN proposes is "to create a competitive, effectively functioning rail system in the U.S. Northeast. The "Northeast Network," to be created through new trackage rights, acquisitions and line improvements, would be composed of the Southern Tier from Buffalo to Croxton, the "Montreal Secondary" Montreal to Syracuse, [the former CV line, now the New England Central unit of RTEX] Montreal to Albany via Palmer, connecting down the east side of the Hudson River, to New York City, the route from New London, Conn., to Oak Point, for connections to New York City and Long Island, and possibly, to promote east-west traffic, the route from Binghamton to Albany."

Other concerns revolve chiefly around Conrail's anti-competitive rate walls and operating practices. Fact is, both CSX and NS are going to need every penny of potential revenue to pay for the deal, and those walls are gonna come tumbling down. For example, some northeastern shortlines that formerly had been cut off to lines other than Conrail have already made agreements with NS to open up interchanges and eliminate paper walls. The CN assumption that the status quo will prevail in this regard is seriously flawed, I believe, and readers are encouraged to go to the CN website and draw their own conclusions.

As CN reaches out for inclusion, Canadian Pacific, the Canadian who's already included, continues to retrench, announcing sale of four line segments in the frozen north. They are the Arborg subdivision, 70-miles between Rugby and Arborg, Man, the Outlook subdivision, 110-miles between Moose Jaw and Broderick, Sask., the Willingdon subdivision, 143-miles between Lloydminster, Sask., and Elk Island, Alta., and the Okanagan subdivision, 46-miles between Sicamous and Vernon, B.C. They just dropped a thousand miles in the US Heartland and within the year most everything east of Montreal. Is a withdrawal to Windsor next? Maybe they should sell their NY and Phila rights to CN and be done.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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