The Railroad Week in Review:
Week Ending February 21, 1998

Last week we promised to put one of raildom's most rapidly appreciating stocks, MotivePower Industries (NYSE: MPO), under our industry spotlight. Our results show a growing company with good forward prospects, however the lack of a long-term record of profitability (MPO lost $40 mm in 1995) may scare off some.

Perhaps we should take a moment to lay out some parameters. The view from here is that a good investment has a number of qualities which can readily be assigned numbers, and these numbers compared with other investment options. To begin, we want more cash than debt, double-digit profit margins and growth in earnings, improving ROE and other ratios plus an active share repurchase program. The target company needs to attract and hold top managers and be a dominant player in the industry. Above all, each of these measures must be sustainable.

MPO 1997 profits, $20 mm, were double those of 1996, and the latter year represented a $50 mm swing from the 1995 loss. Can this pace be sustained? First Call says $1.27 for 1998, up 14% from the $1.11 in 1997, and $1.50 in 1999. Not a doubling to be sure, however the 2-year annual compound growth (ACG) works out to about 16%. And First Call again suggests a respectable 5-year ACG of 20%. Put in perspective, this translates to a forward target stock price of about $30. And increases in the requisite double digits.

In terms of spotlight measures, debt/equity is only 23%, though debt is twice cash, $34 mm vs. $17 mm. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Taxes, from the cash flow statement) is a solid 14.9 times interest expense. ROE meets the double-digit test at 14% and up 40% over 1996. On the down side, margins run a slim 6.6% of sales, yet that's up from 4% a year ago. Revenues 1995-1997 increased 7.7%, and total assets have increased less than a percent in the same two years. Not being a Series 7 broker or a CFA, I'm not about to issue any Buy/Sell recommendations, however the preceding may give you one approach to decide whether an investment in MPO meets your investment parameters.

Of course, one may want to look at new business and backlogs. For example, last week MPO booked a $7 mm order for its Boise subsidiary to build three new commuter locomotives for a California's Caltrain commuter rail line. Under a contract with the Peninsula Corridor Joint Powers Board of San Carlos, Calif., the 3,200-horsepower units will be manufactured at the company's Boise, Idaho facility and delivered in the second half of 1998. The locomotives will provide services for an existing commuter line in California that runs between San Francisco and San Jose.

What goes around comes around. Recall three weeks ago (WIR 1/31/98) reading about Wisconsin's new two-man crew law and how it promised to spread. Well, spread it has, to Illinois and Vermont. By way of review, I wrote, "The way I read the legislation (provided by the WC Law Department), the person actually controlling the locomotive has to be a Certified Locomotive Engineer (CLE) as defined by 49 CFR Part 240. The second person in the cab has to be a qualified trainman in the sense of having passed a rule book exam and being qualified on the track segment operated." The same appears to apply in the new states, with only the fine levels varying. Illinois will cost you $500 to $10,000; in Vermont the tab cab can be $25 to $1,000.

Emons Transportation Group (Nasdaq: EMON) doubled net income to $430,000 on flat revenues of $4 mm in its second fiscal quarter ending 12/31/97 vs. the previous year. Six months into the fiscal year revenues grew 71.3% to $651,000 on only 2% more revenues, $8.2 mm. Chairman Robert Grossman was kind enough to invite me out to York recently and it was encouraging to see what they are doing to work smarter. In the quarter, EMON took a one-time hit from changing an interline marketing agreement, harvesting some low-margin logistics business by turning it over to a service vendor, and converting a transload customer to rail direct, causing a lag in the revenue stream.

Grossman has always struck me as an upbeat kind of guy, and his enthusiasm and optimism are certainly contagious. Every place we went on our brief tour we saw people busy transloading scrap paper, unloading lumber, and filling and emptying bulk trucks with everything from plastic pellets to feed-meal products. Grossman tells me he is quite optimistic for the rest of fiscal '98 and beyond, citing his two new rail acquisitions, new on-line customers, and new market access thanks to single line service opportunities via NS and CSX post merger. I think he's on to something.

Florida East Coast Industries (NYSE: FLA) drew some nice comment from investor Michael Price in Barron's last week. Said Price, head of investment firm Franklin Mutual, FLA is one of those stocks he has owned - and will continue to own "forever." Recall it was trading in the 80-90 range until last May when St. Joe said they'd buy it all for $115, after which the price immediately went there. At the end of November, St Joe said never mind and the stock went back to the mid-90s. It hit $100 a month ago and has been on the move ever since. Price said FLA is more properly valued in the $200 area. I'd be interested in hearing from anybody who has done any work on this one.

Out in the wild and woolly west, the Texas Rail Commission lost in a shootout with the STB. At issue was a commission request that the STB force UP to transfer some lines to other carriers "as a means of altering the competitive balance in the Houston area." The STB responded to say "forced redistribution of private property would be an overreach as the record did not show that the emergency was caused by inadequate competition." The culprit, continued he board, was lack of adequate rail infrastructure in Houston, not who owns what's there. It all comes back to Lesson Number Three in Railroad Profitability 101: If you don't repair and replace you'll never grow with your customers. SP didn't repair and replace, and they didn't grow. QED.

Meanwhile, back at the IC/CN merger, word is circulating around Wall Street that IC investors, having reached the $39 offered by CN, have topped out and might as well move on. UP and NS are suggested as alternatives. Norfolk has been on a steady upward path for the month, hitting $36 on Friday, a point it hasn't hit since August when it was on the way down from its mid-summer high. We're not that far away from the time CR earnings become accretive to those of NS, and it could be the 30's won't be seen again unless something really bad happens.

As for UP, the worst is probably over. The low point around $58 came just before Christmas, and it's been trending up - slowly - ever since. The stock is trading at 15 times 1998 estimates, yet earnings are expected to be up a lot more than that. With a PE of 15 and a yield of 2.8%, would 17 times the 1999 estimate of $4.90 be out of line? Say $83? If that has a shot at happening, getting in at today's $60 might be worth one's while.

Back east, regional carrier Providence & Worcester (AMEX: PWX) filed a registration statement with the SEC for a proposed public offering of 1,025,000 common stock shares. A million of these will come from the P&W itself and the rest from "a shareholder of the Company." In addition, P&W's principal shareholder has granted the underwriter an option to purchase up to 153,750 shares for the purpose of covering over-allotments, if any. If you're interested, the offering will be managed by Advest, Inc. of Hartford, Connecticut. Inn all of this, it is interesting to this ex-New Englander how closely the P&W map is beginning to resemble that of the former New Haven. Will the Poughkeepsie bridge be next?

Sleep on that one till next week, OK?

--Roy Blanchard

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