The Railroad Week in Review:
CSX and NS have reached agreement with the Port Authority of New York and New Jersey on the CSAO concept. The PA's press release said the agreement "satisfies agency concerns about rail freight service to the Port after the railroads acquire Conrail routes and assets." A PA official notes "the [NJ SAA] operating plan can result in significant improvements in the region's rail freight system."
On the topic of the four drivers of shortline profitability, we've had some interesting feedback. A sales rep with a major railroad in the Midwest notes, "Working in Class I sales for nine years, I've found that railroads work on a "push" concept: "The train is leaving, have your cars ready . . . All Aboard!" The focus is misplaced on the rail service provided. Using the "pull" concept, as you outlined in your Toys R Us example (tailoring service and systems to the customer) moves the focus of railroad assets to the source of railroad revenues; our customers.
"Moving the efficient use of assets in rhythm with a "pull" concept makes successful railroading an art not a science." This fits with some observations made by fellow railroad writer Tom Murray (email@example.com). Tom asks, "What's normal?" when it comes to rail service. He cites UP's Dick Davidson's remarks that service "normality" is measured in train starts and carload velocity. Yet customers see "normal service" as having enough cars for loading, inbounds arriving when they're supposed to, and transit times not being too far out on the bell-curve. Murray concludes, "Even as Mr. Davidson's criteria for normal service are met, the customers' are not."
Monday's threatened UP embargo of Mexico traffic was, as Rip Watson reported in Wednesday's JOC, "supplanted by an agreement to speed cross-border operations" that flowed out of a conference call involving UP, BNSF, KCS, and KCS affiliates TFM, TMM, and Tex-Mex." The essence of the agreement is to reroute empties both ways via Brownsville, to pool power, and coordinate train movements. The idea of an embargo arose in the first place, again according to JOC, because UP said TFM couldn't take some 5,000 cars as it was taking its own freight first and leaving the dregs of service availability for Uncle Pete. Tush, said TFM, if UP weren't so bound up they'd have the cars here in such a manner we wouldn't get 50 trains-worth at once.
From the best-kept secrets department comes news of the first new refrigerated boxcar in 27 years. This month UP begins an 18-month performance test of 50 "next-generation" reefers which were designed and built in partnership with Trinity and Hardcore DuPont Composites (full description of the car available at http://www.hardcoredupont.com/railcarpr.html). These 84-foot, plate F cars offer nearly twice as many cubes as a conventional reefer and feature Thermo- King's "Smart Reefer" refrigeration units. A wholly new twist is equipping the fleet with satellite remote monitoring capability. For what it's worth, UP presently operates a fleet of 5,200 reefers, 70% of the total rail fleet, and spends about $10 mm a year maintaining them.
On Thursday Providence & Worcester (AMEX: PWX) moved 240,000 shares (80 times normal volume) and dropped 4.7% to $14.875 in the bargain. The railroad said Thursday it will offer 1.025 million shares of common stock at $14.25 per share, something we posted here the other day albeit sans price. It would appear that holders at 17 thought they could increase their holding by getting off here and getting back on with more tickets bought with the same money. It will be interesting to see if the offering is appropriately well-subscribed or whether holders are getting off for good. One would hope not. The 10-K for 1997 is in and available at the EDGAR website.
The Fortune 500's "Most Admired Companies" series is back. Measures include such items as quality of management, investment value, talent, corporate responsibility, and others. In the rail group, NS was first in class and in every single category; places 2-5 went to BNSF, CSX, UP, and CR respectively. Against the 500, NS ranked in the top ten percent in every measure but innovativeness, where it ranked 104. The worst rail score went to UP, ranked 454 in "products." Click on "Most Admired" under "Sections" on the left side of your screen at www.fortune.com.
Says Fortune, the year's biggest gainer, is Yellow Freight. The trucker posted a 31% jump in its score, moving from No. 8 to No. 3, thanks to a robust 18-month turnaround driven by CEO Maurice Myers. "I arrived at Yellow in 1996 and saw a culture that could best be described as shackled by regulation," Myers says. "The problem was that the business has been deregulated since 1980." Sound familiar?
I've received further word on the recent unfortunate and tragic school bus accident in Montana. Evidently the bus hit the train after the bus had come to a full stop at the crossing which had flashers and cross-bucks, and then for some reason, starting up again as train was whistling. So the train didn't kill the kids, the operator did. I sure hope the first use of the new law is on that driver and the organization operating the bus.
Back in November I started the Industry Snapshot series comparing GNWR, RTEX and WCLX (WIR 11/2/97). I've since refined the process to measure relative strengths in financial ratios, earnings and equity growth, results compared with what you'd get from a Treasury bond, and the usual railroad ratios. The financial measures are current ratio, debt/equity, interest coverage, margin, ROE, and ROA. I then compare the properties and give one point for each measure "won." I revisited the original three and added PWX and in this measure WCLX get 4 points; PWX and GNWR get one each, and RTEX none.
In earnings, PWX has the lowest current price with respect to forward earnings estimates, then GNWR, RTEX, and WCLX. In other words, WC's "fair value" based on forward earnings estimates is $32; at $28 it's 90% there. I think PWX belongs around $24 and at the present $14 it's got a near-double ahead. On equity, I could not include PWX for want of a sufficiently long earnings record. Of the other three, RTEX is the clear winner, with a 45% average annual compound growth in equity 1992-1997. Convert that to equity/share, grow today's number at 45% for five years and you get a forward share price of $103. It's not what you put in the till today, it says here, but rather how you can grow what's in the till today with what you make tomorrow.
If you put your money in ten-year Treasuries, you're guaranteed 5.6%. Since net income per share is the stock owner's "return," a measure of an investment's value is its comparison with the going Treasury rate. Here GNWR wins with a 44% advantage over the bonds based on 1998 estimates. Finally, I look at the railroad operating ratio, the percent change year-over-year of freight revenue per car (plus is increasing yield, minus is decreasing yield), freight revenue/mile, carloads/mile, revenue per employee, and cash flow per share as a percent of price. As in the financials, I award one point for each measure "won".
The final ranking for this Spotlight is WCLX, RTEX, GNWR, and PWX. Even with no equity measure for PWX, the spread is wide enough they couldn't catch WCLX in total score, though the others might shift around. However the real value in the exercise, regardless of who wins, should not be missed on managers responsible for building the revenue base. As the chief driver or railroad profits, revenue gets too little emphasis in the shortline world particularly, where cost control gets more than its share of emphasis. Perpend: if the margins are thin, you're going after the wrong business; if the ROA is too low you're not charging enough or you have too many assets; if your earnings aren't growing faster than the S&P 500 you're making the wrong investment. And so on. It's a thread we're going to develop here, on my web site, and in Railway Age over the next few months. Your observations are eagerly solicited.
NOTE: for an excellent commentary on rails, see "How to Analyze a Transportation Company" in the S&P Commercial Industry Survey, 7/17/97. It's probably best found in a decent library; I found it at Wharton's Lippencott.
For dessert, correspondent Larry DeYoung offers up this bit of brilliance from a magazine contest in search of "Dilbert" type quotes. The winning entry? "As of tomorrow, employees will only be able to access the building using individual security cards. Pictures will be taken next Wednesday and employees will receive their cards in two weeks."
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