The Railroad Week in Review:
Week Ending December 6, 1997

Union Pacific was very much in the news this week. On Friday the STB extended, until March 15, 1998, the emergency service order that, among other things, permitted Tex Mex to handle traffic of the combined UP/SP in Houston as a means to help mitigate the rail service problems in the western United States. The Board found that, while service is showing signs of improvement, the service recovery to date is not broad enough in scope and so concluded that its further involvement was necessary.

The nuts and bolts of the matter are that there has been some improvement, albeit not all as dramatic as all players might like, September through 11/28. There are four critical recovery score card measures: total system car inventory, system train speed, locomotive productivity, crew productivity. The good news is that business still booms so there's no real change in car inventory, yet train hours held for crew and power are down 20% and 45% respectively and train hours held for congestion down 62%. Average train speed is virtually unchanged at 13.5 MPH, well shy of the 18.5 mph goal.

What happened? Perhaps the best commentary I've seen in Fred Frailey's special report in the January issue of Trains magazine. The essence is that SP had figured out how to work around yard size and other limitations and move the freight. UP came to town and said we're doing it the UP way, freezing the system as a result.

Merger Notes: The STB has given NS early approval to construct three new Conrail track connections at a capital cost of $5.5 million at Alexandria, IN, Sidney, IL, and Bucyrus, OH. The parties filed a Safety Integration Plan with the STB December 3 outlining the specific steps to ensure a safe rail system post-transaction. These steps include implementation of NS, CSX and Conrail safety "best practices" and other measures intended to maintain and increase rail safety in the East.

Merger dates to remember: Dec. 15 filing of responses to responsive applications; STB hears oral arguments, June 4, 1998; STB votes on application, June 8, 1998; STB publishes its written decision, July 23, 1998; effective date of the STB decision and the Control Date, Aug. 22, 1998.

NS is using a hypothetical closing date of Sept 1, 1998 for planning purposes; I know of no CSX commitment to any date. However, this topic was broached at last October's NS meeting with the Wall Street types. Question: "If you decided you wanted to go around Christmas and CSX decided the other way, what would happen?" David Goode: "Our plan is to move in tandem with CSX and do it on the same date."

Two trucking firms were upgraded last week. Gruntal raised J. B. Hunt to Hold from Sell noting that the firm will benefit from continued railroad congestion in many parts of the U.S. Gruntal said in a research report the emergence of truck shortages and a lackluster stock prices were also reasons behind the upgrade. Salomon Smith Barney's Jim Valentine upgraded CNF Transportation Inc to outperform from neutral based on the stock's price and a view that the company's fundamentals are strengthening.

I had several meetings with rail analysts in NYC last week more for some mutual updating than anything. Yet the common thread was wanting to know what's happening to these stock prices of Wisconsin Central and RailTex. WCLX below 30 has everybody's head shaking. Could it be a slew of less-than-rosy reports -- unionization of WC, lackluster results in NZ, whatever -- is taking the bloom off the rose? Or is it simply the realization that Burkhardt & Co, can't provide the previous 30%-plus growth in perpetuum?

RTEX is seen as a mix of good and bad news. The bad is that Chidgey is gone and Flohr is talking about a less active role, so what's that do to management continuity? Some say 26 individual railroads each with their own infrastructures is a weakness because of plant duplication; others say it's a strength because if one fails you have others to pick up the slack. Still others say the DT&I purchase still weighs heavily. And so on.

I think the fundamentals are there, and that was the essence of my recent RTEX commentary. What's more, I got to thinking about the yield issue and the answer was there all along: DTI. Recall DTI is an overhead route, so much of the carries a lower rate than it would if originated or terminated. RTEX moved 124,120 carloads in the quarter just past. The DTI is some 255 miles long, so we've got to be looking at minimum 25,500 cars a year or 6,400 cars a quarter. That's five percent of the business running on lower margins. Add to that start-up costs (DTI came to RTEX last Feb) and you begin to see one property eating into the results of the whole.

As for Wisconsin, the week began with Schroders cutting its 1998 earnings estimate to $1.85 per share from $2.00 per share. Still, 1.85 is 13% above the projected $1.64 for 1997. Yet we all know it's trouble when a company is trading for a multiple greater than its forward growth, in this case PE is 17 against growth of 13. Do the numbers and you get a fair price forward of $24.05, making today's $29 a 21% premium. The median First Call five year growth rate is 17%, so call the 1999 estimate $2.34. That's 42% ahead of 1997, for an ACG of 19% and a two year target pushing $40. I'll take 19% on my money any day.

Bringing things back to cases, a reader writes, regarding the current situation, "On WC (domestic) they are having the same problems as UP; a shortage of engines and crews which is causing congestion , lost business and higher car hire costs and I suspect (based on conversations with WC people) that they grew too fast and are having difficulties digesting things. On their Tranzrail sub, coal traffic continues to plunge due to Asian crisis."

Shortline operator John Nolan has sold his interests in his three northern Pennsylvania properties to Emons Transp. I called Emons CEO Robert Grossman and learned that the acquisition helps accomplish his goal to build a regional presence on his current York holdings. Annual traffic and freight revenues on these lines currently approximate 2,500 carloads and $750,000, respectively. The purchase price consists of $500,000 in cash and 85,000 shares of the Company's common stock. Nolan will join Emons as a VP and will oversee the operation of these lines.

Elsewhere, On Thursday Providence & Worcester closed at $19.25,up $2.125 on no particular news and seven and a half times the usual volume. The previous 52-week high was $16.75. I was unable to reach P&W for comment. And RailAmerica's third quarter brought in some nice increases, the best news being that the rail component of total revenues has risen to 45% for the quarter and 45% YTD.

We close on this note. You thought the NS/CSX/CR merger was for the birds? Well, The National Audubon Society has signed on with a coalition of public interest groups supporting the merger.

--Roy Blanchard

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