The Blanchard Company

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The Railroad Week in Review 6/7/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

It's official. The STB has set a 350-day procedural schedule for reviewing the NS-CSX-Conrail unmerger/merger. According to the STB's press release, "a 350-day schedule will ensure that all parties are accorded due process and will allow the board time to consider fully all the issues." Enviromental issues weigh particularly heavily. If you wish to participate, you have from now till 45 days after the filing (set for 6/16) to get your notice in to the STB. You have 120 days after filing to get your conditions in. Orals will come on or about Day 290.

Now that there will be two healthy, aggressive and hungry rail property owners in the Philadelphia market, truckers are getting antsy. For years the trucking industry has dominated the shipping market in South Jersey because of a good highway system and the lack of adequate railroad service. Trucking is a major part of the Camden and Salem ports, with more than 400 trucks a day moving through Camden alone. Currently, the rail and trucks from Camden port send steel to the Midwest, fresh produce throughout the region, plywood to the East Coast and cocoa beans to Hershey, Pa.

At the Port of Philadelphia, 90 percent of the cargo is transported by truck and the new rail services could conceivably shrink that share. But that will take consistency and cost-effectiveness. And the inability of the rails to do that is what the trucks depend on. Rail can be a cheaper way of moving cargo, but shippers may turn to trucking for other reasons. Says one local truckload operator, "There are other factors, timeliness and volume; It may not be cost efficient to move it by train." Winter fruit arriving in Philly for local delivery moves almost exclusively by truck, yet the ports are reaching out three to five hundred miles for markets, and are specifically querying the rails about service options.

Last week was not a good week for Conrail in the derailment department. In New Jersey, a military forklift being carried on a Conrail train struck and destroyed a small bridge Friday, sending eight freight cars down an embankment. "The load was higher than it should have been," said CR spokesman Bob Libkind, adding that the bridge has a clearance of 18 feet, 3 inches, and a tunnel farther west is even lower.

Meanwhile, in upstate NY, a CR freight went into emergency and derailed on the Water Level main line just east of Utica blocking tracks one and two. Some 28 cars went on the ground around midnight, and the resultant mess required the installation of 20 panels of track on track one and 29 panels of track on track two. No cause has been announced.

CN's denial of any wrong-doing in the grain fiasco earlier this year didn't sell at the Canadian Transportation Agency. There will be a public hearing into the Canadian Wheat Board complaint against both CN and CP stemming from an April complaint that the railroads failed to meet their service obligations for the transport of grain last winter. CWB maintains "Poor railway performance this crop year has seriously affected the Canadian Wheat Board's sales program, pool return revenue, farm delivery opportunities and demurrage costs." That being said, CN posted a more than doubling of port business, unloading 3,875 grain cars at the ports last week.

Railroad stock prices year-to-date have continued to follow the pattern of the market in general as the small caps lagged the large caps. DOCP and PWX (Providence & Worcester's new AMEX ticker symbol) were the exceptions as speculation loomed that one or both could be taken out by Norfolk or CSX respectively (see below). CN, CSX, and KCS continued to lead the pack. FEC's run-up peaked with the St. Joe acquisition announcement, and hasn't moved much since. Ditto Conrail once price settled at $115. BNSF and WC are off four and six percent respectively and RTEX is off 27% year to date.

Readers interested in tracking rail stocks (carriers as well as vendors) on a short term basis would be well-served by Schwab's research services for its on-line customers. Friday's report, for example, tells us the greatest day-to-day changes over Thursday's close were rung up by Greenbrier (NYSE: GBX), RailTex (Nasdaq: RTEX), Trinity Industries (NYSE: TRN), RailAmerica (Nasdaq: RAIL), and MotivePower Inds (Nasdaq: MOPO). This screen also provides five-day price change, PE, Price-Book, ROE, Debt/equity, and year-to-year, quarter-to-quarter percent changes in revenues and earnings.

Short Line News

Delaware Otsego saw a surge in shares trades last week. On Wednesday speculation about its being in play as part of the Conrail merger pushed the price to a lofty $20.50 on volume half again as much as usual. By the end of the week it had drifted back to $19 and a more leisurely trading pace of 60% of the average.

RailAmerica continues to be in the news. Readers will recall RAIL is in a buying vein, and so logically has to go looking for funds to support same. On Tuesday RAIL announced an increase in its revolving credit facility to a three-year, $40 million facility with National Bank of Canada and Commerce Bank of Michigan. A previous $25 million revolving line of credit had been with National Bank of Canada.

RailTex carloadings for May 1997 increased 37% over May 1996. On a "same railroad" basis, carloadings increased 3% in May 1997 from May 1996. Year-to-date May 1997 carloadings increased 31% over the prior year period. "Same railroad" carloadings increased 2% over the first five months of 1996. Of particular note in the yield department: coal decreased to 19.7% from 26.1%, lumber and forest products dropped to 13.5% from 16.6%, and chemicals were up 100 basis points to 10.1%. Revenue figures were not given. However 1,400 more cars of chemicals are bound to have a positive effect on earnings, more than enough to offset 300 fewer cars of coal and 600 fewer cars of STCC 24 and 26.

Vendor News

On Monday shares of ABC Rail Products (Nasdaq: ABCR) dropped 4.5% after nearly 300,000 shares changed hands. The trade, amounting to 3.6% of the outstanding shares, was between two institutions. ABCR has been one of the weaker vendors in our market-basket, off 8.08% year to date. For the quarter just ended, ABCR reported income of $263,000, or three cents per share. In the same period last year, the company had a net loss of $2.5 million, equal to 30 cents per share.

Car maker Johnstown America (Nasdaq: JAII) announced that it has won its appeal of its patent infringement lawsuit against Trinity Industries. The 1992 lawsuit alleged that Trinity's Aluminator II coal gondola freight car infringed Johnstown America's patent that is embodied in its BethGon CoalPorter (R) freight car.

MotivePower Industries is one of the better vendor market-basket performers and is expanding its sales and marketing team. MOPO had sales of $291.4 million in 1996. The firm is active in the manufacturing and distribution of engineered locomotive components; provides locomotive fleet maintenance, overhauls and remanufacturing; and manufactures environmentally-friendly switcher, commuter and mid-range (up to 4,000 horsepower) locomotives. The stock has nearly doubled YTD, closing Friday at $14.75 in active trading eight times its average daily volume and nearly triple its price a year ago.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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