The Railroad Week in Review:
The KCS debate continues. In the latest installment, a reader asked, "I am very interested in KSU's rail business and was thinking of buying the stock for the rail. But I am a little scared of the money management side. Do you think that the $30 figure expressed by the analyst in the Barron's article is realistic?"
I thought I'd take a little different tack in responding: "I know little about placing a value on financial management firms so I'll take the $30 on faith and move on from there. The stock is presently trading at $33 and change on three times the normal volume. There are 107 mm shares out, and if the financial side is worth $30, then the rail side is worth $3. That's a $321 mm market value on the rail side.
"KCS operates a 3,300-mile railroad if you include the 400-mile Gateway Western. Do the math and it works out to $97,000 a mile. By comparison, IC now trades at $37 and there are 61 mm shares. Market cap = $2.3 billion. IC operates 3,500 miles including recently re-acquired Chicago Central. Do the math and get $644,000 a mile. This may be an over-simplification, yet it's another way to see if you wish to dig further. Good luck, and let me know where you come out."
To which an Arizona regular replied, "It may be an over-simplification, but given the magnitude of the difference per mile between IC and KCS, it suggests that KCS may be an excellent buy. At $97,000 per mile we're talking in the area of liquidation value. If another carrier expresses an interest in KCS, I would immediately go out and buy more IC stock---one of the four remaining major carriers will quickly go for it ---as at that point there will no one else to "dance the last minuet ".
And the original poster sent this postscript: "I went ahead and bought 100 shares this morning. I can't see a lot of downside to this purchase. I am just nervous about buying a money manager at (what could be) a market top -- brokers and the like get hammered badly if financial assets take a downturn. But the value is too compelling. Thank you for your very kind and detailed response."
Here are some of the details of UP's "Service Recovery Plan" as filed with the STB: (1) Temporarily divert certain traffic over other western class Is and shortlines (betcha that's a first!); (2) Release selected traffic to other railroads; (3) Divert trains from heavily-traveled routes along the Southern Corridor to more lightly used lines; (4) Reroute trains around congested terminals by using satellite yards to handle switching; (5) Suspend some unit coal trains and eliminate four unit coal trains between the Powder River Basin and Mexico. Reduce export coal shipments from Utah to the Southern California ports; (6) Reposition up to 600 locomotives -- the equivalent of total UP locomotive purchases between 1995-97.
To be sure, this has got to cost a bundle. First Call says estimates for the year have dropped to $3.14 from $3.85 a share in the last 90 days. Of that, 50 cents has been lost in the last week. If you apply the industry average PE of 16.5, you get a decrease in "fair value" share price to $51.01 from $63.52, a drop of 18%. It closed today (10/7) at $63.94, down 81 cents on a third of its average daily volume.
The official word from the website is, "The service recovery effort is expected to adversely affect Union Pacific Corporation's financial performance for the remainder of 1997, and could lower earnings in first quarter 1998 as well. While third quarter 1997 earnings are expected to be approximately 10-15 percent above last year's $.79 per share [First Call: 90 cts, up 14%; Dec 97 qtr 70 cts, down 25%] , this is lower than the increase previously expected by the company, and excludes one-time merger implementation costs as well as the gain from a real estate - related transaction.
"Based upon preliminary estimates of the costs associated with the recovery plan, and the recovery timetable as filed with the Surface Transportation Board, the company estimates full-year earnings (excluding one-time merger implementation costs) could be up approximately 5-10 percent versus 1996 pro forma earnings per share of $2.71." The present $3.14 full-year estimate represents a gain of 16%. Separately, the STB will hold hearings on western rail problems on Oct. 27 starting at 10 AM at 1925 K St NW in Washington. Call Dennis Watson, (202) 565-1596 for info.
Back in the real world of day-to-day railroad operations, the UP website has an excellent series of maps showing the various SP segments together with how and when and how they will be intergrated into the present UP system. The URL is http://www.uprr.com/uprr/ffh/maps/addmap.htm.
The CSX Transportation website has a full section devoted to "The Great New Orleans Train Robbery" (http://www.csx.com/med/trainrob.htm). The lead is a quote from a 9/11/97 Times Picayune editorial: "A New Orleans jury's $3.4 billion punitive damage judgment in the 1987 chemical fire that forced the evacuation of a Gentilly neighborhood leaves us adjective-challenged. Outrageous. Astounding. Unfathomable. Perhaps all of those together, plus a few more, would begin to come close to describing how out of whack this award is." Do go to the site for a good read, especially the background article. You'll see how ludicrous the whole thing is, especially when you see it started with a residential water heater.
Our Canadian Stock Watcher picked up the news item about CN going to US accounting in addition to Canadian accounting method. The press release says "While there will be no impact on CN's cash flow, the company believes the adoption of accounting changes under US GAAP will improve its operating ratio by approximately 2.5 percentage points and favorably affect its earnings per share. Shareholder's equity will also increase approximately $600 million." Shares were up $2.31 as this stock closes in on a double for the year.
Operation Lifesaver is coming on like gangbusters. Tuesday evening I must have gotten twenty nearly identical posts trumpeting, "The most graphic and hardest hitting highway-rail crossing public safety campaign in history is now running in [state]. The campaign, known as 'Highways or Dieways' includes television and radio public service announcements (PSAs) promoting safety at highway-rail crossings." Watch for it on a TV near you.
Shortlines and Regionals: RailTex, Inc. has released September 1997 carloadings were up 41% YOY. The Company experienced traffic gains in autos, coal, chemicals, and other products. On a "same railroad" basis, carloadings increased 5% to 31,347 in September 1997 from 29,759 in September 1996...The Southern Railroad Company of New Jersey (SRNJ) has just announced its freight operating results for the first nine months. Carloads for the period were up 16% and revenues up 31% over the corresponding period last year. The railroad continues to broaden its customer base and anticipates an even stronger year in 1998. The SRNJ operates three lines in southern New Jersey totally about 75 route miles. Commodities include agricultural products, canned goods, chemicals, sand, stone, and lumber.
Amtrak notes: A press release about the Silver Star hitting a truck near Savannah notes, "It was carrying 151 passengers and 17 crew members." Lessee. That's 8.8 passengers per crew member. On a 737 you have a ratio of 100 to three. With a service edge like this, why aren't they flocking to Amtrak in droves?
This just in: Dennis Watson of the STB called to say they expect to have a fully functional website up within the month. Which means all the nifty press releases I've been getting by snail-mail will be up and available for all to read.
Hope to see all of you at the ASLRA annual meeting in Dallas!
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