The Blanchard Company

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The Railroad Week in Review 7/12/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

According to the Journal of Commerce, Railroad Development Corp. of Pittsburgh won the Guatemalan government's 50-year concession to resume rail service, beginning with the line between two Atlantic Ocean ports (Puerto Barrios and Puerto Santo Tomas) and Guatemala City, a 200-mile trip. If all goes well, service could begin approximately nine months after negotiation of final terms and repair of the rail lines built 100 years ago and not used for the past year. Potential cargo includes exports of bananas and inbound shipments of consumer goods that now move by truck. Other potential cargo includes cement, coffee, sugar, steel and scrap. Regular readers will recall that Rail Development Corporation had Conrail's "Camden Cluster" acquisition shot out from under them in the 11th hour as a result of the Conrail/CSX/NS transaction.

Shortliners everywhere know what happens all to often when they try to reopen a line that's been closed for years. BNSF got it in spades from officials in Kent and Auburn, Washington when plans were announced to reopen the Stampede Pass Route as a mainline artery. The locals said that BNSF had to get permits from them before work could be done. BNSF did just that, however maintained from the start that local jurisdiction over railroad operations was preempted by federal law.

The towns thought such authority died with the ICC in 1995, but the STB ruled otherwise, saying, "A state or local permitting process for prior approval of this project . . . would of necessity impinge upon the federal regulation of interstate commerce. A state or local permitting process implies the power to deny authorization (for improvements), which could frustrate the activity that is subject to federal control." Bring that up next time the NIMBYs get up in arms over a rehab project.

On Wednesday car manufacturer Greenbrier reported results for the quarter ending 5/31/97 were off 20% from the 1996 quarter. Earnings remained at 35 cents a share. For the nine months ended May 31, 1997 revenues were off 7% from the1996 figure. Earnings dropped to 42 cents a share from 98 cents. The new car backlog at the end of the period was 2,600 cars ($143 MM), up from 1,400 cars ($82 MM) at the end of the previous quarter. Company Treasurer Mark Rittenbaum attributed revenue and earnings change in part to "lower overall deliveries in a softer freight car market, an intensely competitive environment, and a less favorable product mix." Going forward, Greenbrier said it expects "to operate at higher production levels and with a more favorable product mix -- including double-stack cars -- over the next two quarters, when compared to the prior two quarters."

Also on Wednesday RailTex reported carloadings for June were up a third over June 1996. According to a press release received here, there were gains in autos, coal, chemicals, paper, metals and other products. On a "same railroad" basis, carloadings increased 6% to 30,602 in June 1997 from 28,818 in June 1996, with gains in coal, paper and chemicals. Farm products and metals were off, however the "same railroad" results are a lot better than they were last time we looked (Week in Review, 6/14/97). Year-to-date June 1997 system carloadings increased 32% to 231,940 from 176,134 in the prior year period. "Same railroad" carloadings increased 2% to 177,776 from 173,852 in the prior year period. Meanwhile, Merrill Lynch chief rail analyst Mike Lloyd initiated coverage of RTEX with intermediate and long-term buy ratings and a 12-month target in the $22 to 23 range RTEX closed Friday at $18.875 up 3/8 on 69,400 shares traded, just shy of the average daily volume.

Investors Corner. Last week we posed the question as to why Wisconsin Central trades at such lofty levels and RTEX continues to lag the averages. A reader in NYC suggests that "WCLX is not only a railroad, but a transportation management company as well. In both New Zealand and Britain, they are using their management expertise. Both of these lines, were probably undervalued assets, that because of privitization are doing well. Furthermore, WCLX has limited financial exposure as it has only a third equity stake in each. In Wisconsin the railroad has done well integrating a connected system which goes eventually into the railroad heartland- Chicago. And RailTex's biggest problem is that the system is not interconnected in many areas. Thus, there is no economy of the "mini" merger, There is a lot of duplication, fixed costs, etc."

Reader and rail entrepreneur Tim Eklund in Chicago responded, "WCLX has traded at a substantial premium on both revenues and earnings for several years now. I think much of that has to do with the market's approval of the entrepreneurial and aggressive management style of Burkhardt, Powers, et al. WCLX has really never looked back from its inception in 1987, and has not disappointed investors or analysts. Problem is, how do you continue to grow revenues to continue to justify the high multiple? WCLX has probably realized a substantial portion of the synergy gains from their Wisconsin acquisitions (GBW, FRV) and have become the dominant railroad in the State. And the gains realized from the New Zealand and Brit Rail stuff are probably also built into the stock price. So in order to continue to justify the premium built into the stock price going forward, WCLX may have to go on an additional acquisitions spree.

"As for RTEX, I have never been a big fan of the short-line operators that build their business by piece-meal, isolated railroads that cannot be combined into a larger system. This type of acquisitions strategy does not provide for traffic synergy, efficiency gains, increasing number of connections with Class 1s, etc., leading to the leverage you get from having a few assets doing a lot if things. "

Earnings for the second quarter and first half will begin to trickle in this week.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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