The Blanchard Company

Marketing and Management Support
for Feeder Railroads

The Railroad Week in Review 7/26/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

The BLE and UTU won a significant victory this week on the Wisconsin Central. The railroad was advised by the National Mediation Board (NMB) that locomotive engineers selected the BLE and the conductors voted in the UTU. The elections will affect manning on the WC itself plus its wholly-owned Fox Valley & Western Ltd. and Sault Ste. Marie Bridge Company subsidiaries. The NMB said that among engineers, 29.7 percent voted in favor of the BLE and 21.6 percent in favor of the UTU. Among conductors, 43.6 percent voted in favor of the UTU and 17.0 percent in favor of the BLE. Under the Railway Labor Act, a plurality of votes will elect a union when over 50 percent of the employees vote in favor of union representation.

Investors reacted to the news by dropping WC shares Monday morning by 2 5/8 on ten times the average daily volume, i.e., 3.8 mm shares traded on an average volume of 375,000 shares. It had gone as low as 29 1/2 at one point, but closed at 31. Monday's price trim brought the stock down to a more respectable PE of 17.8 on estimated 1997 earnings of $1.74, down 4.4% from $1.82 three months ago. The 1998 estimate is now $2.08, down 5.9% from $2.21 three months ago. By the end of the week, much of the damage had been erased as the stock finished at 32 5/8, a loss of $1.61 for the week. The daily volume had subsided to something approaching its norm by Friday.

Kansas City's George Baum Investment house has turned more cautious, too. Last August they issued a BUY report citing WC's overseas exposure plus the likelihood of an other acquisition (it was UP's Duck Creek North, as it turned out). Tuesday’s mail brought a revised report from Baum revising WC down to NEUTRAL. The focus remains overseas as WC seeks to absorb its most recent acquisition.

Investors will want to be mindful that WCLX trades at a whopping six times per-share revenues, more than three times the industry average. Interest coverage dropped to less than six times in 1996 from more than seven times in 1995. Revenues were essentially flat 95-96, though the asset base increased 26% to $691 mm from $551 mm. Red flags go up here when assets increase markedly faster than revenues because that drives down revenue yield per asset dollar -- productivity, in a word.

Tuesday Norfolk Southern announced a 3-for-1 stock split and the stock immediately jumped $4 7/16 to close at $113 3/16 on the day. The dividend will be upped to 60 cents a share on a pre-split basis to shareholders of record Aug 1, payable Sep 10. The split is also expected to be effective in early September. On Wednesday NS announced 2Q net income of $200.8 million before and $190.1 million after Conrail-related items. Earnings per share were $1.61 before and $1.52 after the Conrail-related items. Excluding Conrail-related items, both net income and earnings per share were second-quarter records. The operating ratio shed another point from 2Q96, dropping to 70.0 from 71.1 percent.

CSX also reported 2Q results this week. Earnings were off slightly from a year ago, $227 million, $1.04 per share, vs. $234 million, $1.11 per share, in the 1996 quarter. The 1997 results reflect increased costs associated with CSX's investment in Conrail and its equity in Conrail's earnings. Excluding the Conrail impact, second-quarter earnings would have been a record $245 million, $1.13 per share. CSX also reported an all-time low operating ratio of 72.9 percent. Meanwhile, S&P downgraded The rating to BBB from BBB+. It was the largest dollar volume of debt affected for the quarter.

In an unrelated development, Federal Railroad Administration (FRA) on Monday established a "safety action team" on CSXT. This group will focus on signal, dispatch, operating practices, and hazardous materials disciplines in the context of the overall safety culture on CSXT. The FRA called for the meeting after several recent incidents involving CSXT, one of which involved an Amtrak train.

Burlington Northern Santa Fe announced record 2Q results with net income of $235 million, or $1.50 per share, compared with second quarter 1996 net income of $211 million, or $1.35 per share. The operating ratio improved to 77.9 percent for the second quarter 1997 compared with 79.3 percent a year earlier. The line sale program continued with an agreement to sell its 139-mile Pensacola Line that extends from Kimbrough, Ala., to Pensacola, Fla., to Alabama & Gulf Coast Railway, LLC (A&GC), a unit of privately-held Dallas-based StatesRail. According to a BNSF statement, the sale is expected to close in early fall and, as a part of the agreement, A&GC will re-open BNSF's line between Atmore, Ala., and Cantonment, Fla. Construction on two railroad bridges at Atmore, along with track rehabilitation work between Atmore and Cantonment, will begin as early as this week.

For Dessert: Eight railroad industry firms made the front page the day the Wall Street Journal opened for business 100 years ago this month. The Reading traded 7,000 shares for a bullish 22 1/2 in Philadelphia. Wheeling & Lake Erie declared a 1% dividend; Jersey Central declared one for 1 1/2%. Boston & Albany and Connecticut River Railroad were dickering over a building sale in Boston. Strikes on the Lehigh & Reading lost business to Jersey Central. Toledo Ann Arbor & Michigan was advertising bonds and the New York Equipment Co. at 10 Wall Street was advertising railway equipment.

How times change.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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