The Railroad Week in Review:
The UP/SP situation continues to take center stage. This week, UP bit the bullet and cut this quarter’s dividend to 20 cents from 43 cents and said there would be a loss for the quarter as it commits yet more resources to solving the operating problems brought about by the SP merger. The stock market responded immediately by hammering it down to $51.375, an 18% loss YTD. A press release from UP says the $230 mm saved this year by he dividend cut will go to improving key infrastructure shortcomings. In addition, the release says UP has “plans to issue equity-related securities at a later date to guarantee the funds needed to restore quality service to customers and to meet future growth opportunities.” As none other than Warren Buffett has noted, if your company can make more by putting the cash back into the company than by sending you a check, then you should applaud your management for doing so.
The news was not greeted by The Street as all bad. It’s been written here before, and bears writing again: the Union Pacific franchise is tops, the company is basically first rate, and the difficulties getting through this merger will be overcome. Union Pacific is not going to go away, and UP at $51 could be the buying opportunity of a lifetime, assuming you have no intention to sell in that lifetime. We may develop this theme next week.
Last week I wrote about Michael Price and Florida East Coast Industries (NYSE: FLA). A friend who is a lot closer to the issues writes, "Last May, St Joe offered $102 per share for the remaining portion of FLA that it didn't own, not $115 as the WIR states. The interesting part, though, is that the stock immediately went higher than the offer price ($114 is the 52-week high and it stayed in the $108-110 range). The market believed the true value of FLA to be much more than the offer and St Joe would have to pay more and/or another buyer might step in.
"In November, St. Joe withdrew its offer after 6 months of discussions with an independent committee of the FLA board (the committee was probably forced to demand more money for FLA due to unconfirmed market perceptions). I'd hate to see the shareholder lawsuits if they sold for $102! I think there was one shareholder lawsuit already started right after the St. Joe offer.
"On another interesting note, Michael Price (Franklin Industries) increased its ownership in FLA from 5% to 15% right after the St Joe offer in May (filed with SEC). He confirmed 15% ownership in June, I think. He obviously believes that stock is undervalued, although the tough part about valuing FLA is, as you know, the inherent property values. Its Grand Central subsidiary owns significant amounts of real estate in Florida (which is what St. Joe is interested in as it is now a real estate company).
"The railroad ROW probably has significant property value, particularly in South Florida, and that makes valuation difficult. The value of the FEC railroad to another railroad will only be the value of the freight franchise and will have nothing to do with the ROW property value. Others look at the ROW property value and the Gran Central property values (probably much appreciation). Figuring true value is tough for the whole company (FEC and Gran Central together). Finally, with St Joe owning +-54% of FLA, Michael Price 15% and the Nemours Foundation 5%, there isn't a lot out there for the public. There's probably fewer than 500 other shareholders out there." Special thanks to our correspondent for the detailed report.
On Wednesday both the Journal of Commerce and the Wall Street Journal ran features on an FRA safety audit that was critical of CSX safety practices. No fines were identified in the report, and the alleged violations ranged from moving a leaking tank car (didn't say if it was Hazmat) to letting some loco inspections get out past 92 days. Perhaps the most serious charge was that "CSX front line managers emphasized train operations over safety" and that there were reports of harassment and intimidation when employees raised safety issues. Tom Hoppin, VP Corporate Communications for CSX, responds that the culture at CSX in no way shorts safety, and that Jolene herself has given CSX' readiness to address safety issues good reviews. After all, CSX did hire one of her own, Jim Schultz, as its chief safety officer.
There’s been yet another complaint of railroads keeping safety stats pretty by pressuring employees not to report incidents. Dan Pickett, chair of the Rail Labor Division of the AFL-CIO's Transportation Trades Department and an officer of the Railway Signalmen, is one whose testimony has brought up intimidation. According to Pickett, "All too often, the Harriman Award, given to the railroad with the best safety record, goes to the railroad with the best system for suppressing accident and injury reports."
Readers will recall I've done a fair amount of work for NS, the company with eight Harrimans in a row. In the course if this work I've often been asked about the rumored link between intimidation and the Harrimans. So I started asking around at NS, starting with Steve Tobias, EVP-Operations, on down through the ranks. The answer has universally been, if there's somebody being pressured, we need to know about it. Tell us who, when, and the circumstances and we'll lean on supervision, not the employee. And again universally, my contacts have said no real incidents have been forthcoming.
Regional and Shortline News: The DM&E effort to access the Powder River Basin (PRB) is gathering steam as it seeks the STB's official OK to build a 280-mile branch at an estimated cost of $1.4 billion. UP and BNSF hauled about 200 mm tons out of the area last year, so it's not exactly small potatoes as the PRB was the rail industry’s single largest revenue source. It's a growing business, too, with projections running to double that in the near term. The proposed route (get out your BNSF map) would enter Wyoming in the northeast corner. The resulting route to upper-Midwest coal burners could be as much as 30% shorter than either UP or BNSF, who have to go either Montana or Nebraska to get to Wisconsin and Illinois. As you'd expect, there's lots of local opposition. And neither UP nor BNSF are likely to sit quietly. Still, it's an audacious venture and one which will be closely watched.
Score a major win for New England Central (NEC), the former Central Vermont now operated by RailTex (Nasdaq: RTEX). Specialty trucking firm Chemical Leaman and its subsidiary TransPlastics have opened a new rail transfer, dry bulk trucking, plastic packaging and warehousing facility on the NEC in Palmer, Massachusetts. The transload facility, located in the Palmer, Massachusetts Industrial Park, is served by the NECR. The facility has 120 rail car spots at Palmer, Massachusetts and an additional 200 rail car storage capacity in Brattleboro, Vermont.
New York Regional Railroad (OTC: NYRR), the holding company that owns New York Cross Harbor Railroad, has negotiated the conversion of $1.75 million of company debt into NYRR equity. This provides a strong capital equity base of approximately $10 million with no bank debt. The Company currently has 146 million shares outstanding with employees, managers and directors holding 60 percent. By way of comparison, BNI has 156 mm shares outstanding, GNWR 5 mm, and WCLX has 51 mm. Robert Crawford, Chairman, says the shares are trading at about 20 cents for a market cap of $29.2 mm.
Vendor Notes: Varlen Corporation (Nasdaq: VRLN) results for the fiscal year ending 1/31/98 show net sales grew 27.5% $522.3 million on strong performance by its transportation businesses. Operating earnings increased 33.9% to $63.2 million thanks in part to higher production volume, operating leverage and productivity enhancements. Net earnings were up 43.6% to $25.7 million, or $1.93 per diluted share. For the year, VRLN was a clear double, advancing to $24.77 from $12.66. First Call currently holds VRLN at a 2.0 recommendation, hold, on anticipated 14% growth in earnings for the present fiscal year.
For dessert, and before you turn off your computer: New Jersey railroad historian Paul Tupaczewski has uncovered a treasure trove of old railroad photos and has graciously posted a remarkable turn-of-the century shot of Boonton, NJ. Paul presents the overall scene, then zooms in on portions, and finishes with a present-day photo of the same scene. The series is well worth a visit -- the original photo is from an 8x10 glass plate, so the resolution is incredible. The main photo is at http://paultup.el.wny.org/boonton/oldbtn.jpg. Other images:
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