The Railroad Week in Review:
A copy of the North Jersey Shared Assets Area (SAA) operating plan fell off the back of a truck in front of my house the other day. Readers will recall this is the document filed by NS and CSX in response to a NY Port Authority request of the STB. At first glance, the number of trains in and out of the SAA appears to increase by about sixty percent, if you count the listed NS plus CSX trains compared to the list of present CR trains. A second glance back at the Verified Statement by Messrs. Orrison and Mohan will help put these proposed schedules in perspective.
Say the writers, "With respect to future service, CSX and NS will compete vigorously for traffic in the SAA. Thus CSX and NS are prepared to offer service for much of the existing CR traffic as they can be reasonably expected to capture. The result is two robust operating plans that at first glance (emphasis added) may suggest an increase in trains in the SAA. However, a number of the CSX and NS proposed train schedules anticipate capturing the same traffic and duplicative train service will be reconciled."
So it seems if most of the traffic in a given lane winds up on one guy's train, the other guy's may be "reconciled." In like manner, there are a lot of freight trains shown on NJT and NEC rails during the daylight hours. All this means is that NS and CSX have negotiated slots with the owners. If you have the slot reserved, you can run the train. Slots not used can always be cancelled.
One of the best-written presentations to come across my desk in a long time is the "Responsive Application of the Livonia, Avon & Lakeville" in the CR merger. In it the LAL explains why certain paper barriers must be removed as a condition to STB's approval of the merger. The application does not ask for extensive trackage rights, purchase of track, or special dispensation. It makes the case simply, directly, passionately, and eloquently.
The author cites precedent (the USRA Final System Plan creating CR was admittedly flawed), experience (dealing with the results of the flaw) and benefit (what LAL has created for its customer base). The application contains maps, references to verified statements from customers, a quote from the NS 1996 Annual Report, and excerpts from the ICC's evaluation of the FSP. The document concludes by "asking for the order, " i.e., by restating the conditions and the reason for the filing.
I stand corrected: The 45-day procedural schedule extension does not affect filing dates as listed. It means oral arguments will be heard June 4, 1998, changed from April 9. The voting conference will be June 8 (was April 14) and the written decision July 23 (was June 8). All other dates remain the same. Sorry for the confusion; it just took some time to find out exactly what a poorly-worded release was really trying to say. Also, the STB now has its own website at www.stb.dot.gov/. Check the "Conrail acquisition" link in this regard.
Here's another innovative use of web technology. Conrail has put up application forms for pipe, wire, and private grade crossings at http://www.conrail.com/pdf.htm. These (and the spec lists that go with them) are *.pdf files. For those who don't already have the popular Adobe® Acrobat® reader the Webmaster has provided a link for free downloading.
Last week we saw that among railroad stocks there was a respectable handful that had not yet reached their "fair value." We looked at year-out prospects as well as the more familiar price-earnings/growth ratio. This week we'll see which rail suppliers might have some way to go in stock prices. There are some really weird swings between YPEGs and the near term PEGs. ABC Rail, for example, reports a current PE of 19 and a 97-98 estimated EPS growth rate of 156%. Yet the YPEG is 19% overpriced.
Johnston Industries current price is 90% of its long term potential yet has a 400% growth estimate for 1998 and a PE of 59. Wabash and Greenbrier both trade at premiums to their YPEGs yet have 97-98 PEGs of under 0.5 meaning the stock could double in the year. Ever-popular MotivePower is now priced at nearly twice its long term potential and at a 20% premium to its 97-98 estimates. Westinghouse Air Brake on 10/31 was trading at 17.7 times 1998 estimates on a predicted 12% EPS growth rate, giving it a PEG of 1.48, right on the brink of becoming a potential for short-selling.
The best of the lot? Probably Alsthom trading at 27 times 1998 estimates and sporting a year-forward growth rate of 63%. The farthest forward estimate of $1.98 and a 5-year growth rate of 14% yields a forward of price of $27.72. Today's $24.44 price is a 16% discount to that number.
A friend close to the car building business forwarded me the latest estimates for the year. At the end of July they were predicting 43,200 cars of all types. By the end of Oct that number had jumped 29% to 58,050. Covered hoppers lead in sheer numbers with 23,500, representing 38% of the total and up 43% in the last three months. Gons at 8,000 copies represent 23% of the total; tank cars and OT hoppers at 10,000 each represent 22% of the total combining the two.
Surprisingly, flat cars of all types, largely intermodal platforms though not differentiated as such, represent just 14% of the total yet were up by 55% over the July count. With 86% of new car orders in non-intermodal equipment, it would appear to be good news for the carload business. That bodes well for the industry since carload operating margins are in the 60s compared to the 90s for intermodal.
A "snapshot" of the numbers for the three public carbuilders turns up some interesting comparisons. For my money, six ratios are key: margin, current ratio, debt/equity, interest coverage, ROE, and ROA. What's more, I use a calculated ROE rather than a simple income/equity ratio. It's the product of margin (income/sales), yield (sales/assets), and leverage (assets/equity). As you can see from the algebra, sales and assets cancel each other out leaving income/equity. Building your own number gives a little better feel for what's really going on inside the numbers and is not always the same as the usual two-number ratio taken straight from the books.
Once you have the ratios, compare your target companies and see which "win" the most. TRN is the winner in four of the ratios with GBX having a better current ratio and eking out a one percentage point lead in ROE. A note of caution on JAII, however. There's eight times as much debt as there is equity if you include goodwill and "other intangibles" as debt (see your Graham and Dodge on this one). In fact, there's so much leverage associated with this stock that the interest payment exceeded EBITDA by $5.3 mm for the year ending 12/31/96.
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