The Railroad Week in Review:
Week Ending January 17, 1998

It appears that some shortlines' worst fears are being realized. It is reported a class I is raising rates to shortline points on some commodities, as my correspondent puts it, "in hopes of driving the business off the shortlines and into bulk terminals." Evidently the class I increased its revenue requirement to the shortline interchange enough to discourage more than 200 cars of bulk commodity that was to be rail-direct to the customer and then pitched its own truck-transfer terminal to the shortline customer.

Unfortunately, this goes squarely against the wishes of many states' filings in merger documents, saying they want to protect their shortlines' ability to decrease truck traffic on congested state roads. In a press release on industrial development , CR (not the offending party) notes, "Other benefits of increased use of rail freight service include reduced truck traffic on local roads and, because railroads are more fuel efficient, reduced pollution emissions per ton of freight transported." Replacing shortline rail-direct with bulk-transfer plus truck puts more trucks on the road, not less, something state DOTs are very sensitive about. Says one shortline owner, "There is a real shortline be damned attitude out there in some of the marketing groups. Maybe it is time to re-regulate the railroads!!" He has a point.

Norfolk Southern's 1998 capex program calls for an investment of $903 million for railroad operations. This compares with $781 million originally planned for 1997. The 1998 figure includes $149 million to cover initial expenditures for facilities and equipment related to NS' 52% share of the CR acquisition. Of the balance, $279 million is budgeted for the railway's rail, tie, ballast and bridge replacement programs (up 4% from 1997) plus $237 million for new six-axle power and additions to the car fleet. Included are auto racks, hi- cube boxcars for auto parts, coil steel gons, billet flatcars for steel, lumber center-beams, and small-cube covered hoppers. Another $44 million will go rehabbing the current car fleet plus another $166 million for its program to enhance what was bought from CR.

Elsewhere, NS will sell its North American Van Lines subsidiary to a fund managed by NY investment firm Clayton, Dubilier & Rice for $200 million. The transaction is subject to customary closing conditions and is expected to be consummated before May 31, 1998. NAVL is headquartered in Ft. Wayne and operates household moving and specialized freight handling services in the United States, Canada and Europe. The company was founded in 1933. NS acquired NAVL from PepsiCo in 1985.

CSX finished 1997 ahead of schedule on its $220 million railroad capacity expansion project between Chicago and Greenwich, Ohio, double-tracking, and in some places triple-tracking its former B&O main. The railroad has completed restoring the second track on 47 miles of the 113 mile project. The Chicago- to-Greenwich upgrade is part of a half-billion dollar capital improvement program CSXT is planning over and above its regular capital spending to smoothly integrate roughly half of the Conrail rail system into its own.

In addition to the 47 miles of track installation, 96 miles of rail right-of- way property was graded in 1997 in preparation for track construction this year. Nearly 150,000 ties and about 230,000 tons of rock ballast were installed throughout Ohio and Indiana. Forty-eight public and 40 private highway-rail grade crossings were reconstructed where new rail has been placed. Seven new railroad bridges have been completed, and four others are under construction. Work crews have upgraded track and highway-rail grade crossings on the existing main in both states.

A major breakthrough on the CR merger front occurred this week when the UTU came out in support of it. UTU, the largest rail union with 76,000 members, said that in exchange for dropping its opposition, it won strengthened job protection and certification commitments for members who would be harmed by the Conrail breakup. For its part, NS said it "is pleased to have the UTU's support. The agreement, which recognizes the importance of providing protection to employees and is sensitive to the needs of the workers to know where their future assignments might be, demonstrates the desire of the UTU General Chairmen on Conrail, CSX and Norfolk Southern to provide superior service to our customers."

Newark International Airport's monorail connection to the Northeast Corridor (NEC) is beginning to take shape. Pittsburgh-based Adtranz will extend the airport's two-mile system another mile across Route 1-9 to NEC tracks near Haynes Avenue in Newark. Terminal Construction of Woodbridge (NJ) has the $19.2 million NJ Transit contract to build two new stations at Conrail's former Waverly Yards. One station, with 1,050-foot platforms, will serve the NJ Transit and Amtrak trains that make the airport stop. That station will be connected to a new monorail station by a 350-foot elevated concourse.

Projections say up to 7,000 people daily will use the connection, the beginnings of which are visible on the west side of the NEC timetable east of CP Lane. Some riders will arrive via train from outlying areas (like Philadelphia, but that's another story) while others will take NJT trains to and from Manhattan, just 20 minutes from the stop. Thus far crews have laid ballast and driven piles as part of a $10.5 million contract to be finished by October or November. By spring 1999, the job will be completed with the relocation of two Conrail (future CSAO) freight tracks.

Vendor Notes: Wabash National has received $25 million in new RoadRailer orders from Triple Crown Services (TCS) for 940 RoadRailer 53-foot plate trailers and a number of RailRoader on-rail wheel-sets. Delivery is set for later this year, so it looks like it'll be a pure NS purchase. Elsewhere on NS, GE Harris Railway Electronics has been selected to provide the dispatch system for NS' Unified Train Control System. It will connect 9 NS divisional centers and 2 centralized hubs. (This makes sense since NS and CR are the last two railroads dispatched on a divisional basis). The open design of the Harris system can easily accommodate NS' system expansion.

Greenbrier reports fiscal 1998 first quarter earnings of $4.1 million, or $.29 per share, up 40% from $2.9 million, or $.21 per share, in the first quarter of fiscal 1997. Revenues for the quarter were $138.0 million, up 8% from the $127.4 million in the same fiscal 1997 period. The prior year's first quarter results included a loss from discontinued logistics operations of $.7 million; earnings from continuing operations were $3.6 million, or $.25 per share.

During the first quarter of fiscal 1998, the Company received new orders for over 5,600 railcars. These orders increased Greenbrier's backlog to 6,600 railcars valued at $326 million as of November 30, 1997. This compares to a backlog of 2,600 cars valued at $133 million as of August 31, 1997.Greenbrier also has entered into a letter of intent to acquire the assets of Pacific Railcar Inc., a railcar repair and refurbishment facility located in Finley, Washington. The facility has annual revenues of approximately $3 million and has access to both BNSF and UP.

Upgrades and downgrades: Gruntal & Co said Monday it raised its rating on Illinois Central railroad to buy from hold, noting that the stock had fallen since October while earnings estimates held steady. Gruntal set a 12-month target price of $41 a share and maintained its fiscal 1998 earnings estimate at $2.70. Gruntal said fourth quarter 1997 carloadings declined by about one percent, reflecting a sharp drop in coal and grain loadings but a 10 percent increase in merchandise business.

Also on Monday Gruntal lowered its 4Q earnings estimates for Burlington Northern Santa Fe (BNI) to $1.71 from $2.16; 1997 $5.95 from $6.30. In the process, BNI stock has dropped 8.6% in the last week. How can this be? The technical view from here is that BNI price got ahead of itself. Recall one test for forward fair value stock price is farthest earnings times First Call's five year growth rate. The 1998 estimate is now $7.21 and the 5-year growth rate is 12%. Fair value two to five years out is thus around $86 1/2. BNI closed Friday at $85, so it's already 98% of the future fair value, and that doesn't leave much room to grow.

Time to watch the truckers. Brokerage firm A. G. Edwards raised Werner to Buy from Maintain, no other comment. However, an instructive note appears in Barron's for Jan 12. The "Market Laboratory" in the back of the Market Week insert ranks 100 Dow Jones industry groups by week, YTD, and year ago. The trucking industry ranked 1,2, and 3 respectively. The rails stood at 43, 49, and 71 by comparison.

--Roy Blanchard

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