The Railroad Week in Review:
Week Ending May 9, 1998

One of the measures of stock price vs. value is the "moving 200-day average." Value-watchers look for prices trading at or below that benchmark; growth watchers look for continuing divergence. In the rail business, three interesting comparisons emerge: NS and CSX, CN and CP, BNSF and UP.

Norfolk and CSX have remarkably similar curves for the past year, both are up about ten percent over the past 12 months, and both are now at or slightly below the benchmark. Out west, the curves diverge. BNSF back in June 1997 was slightly below the mark moved up in the fall, and crossed below again in January. The stock rallied again in April and is now only slightly above the line. UP, on the other hand, was ahead of the mark in June, peaked in July, dropped below the line in August, and saw-toothed its way lower through February falling briefly below 50. The trend since then has been a steady convergence of the price and the average.

The Canadians present a still different picture. Recall CN went public in November, 1995. Today's $65 share price represents a near doubling since then. it has always traded above the average except for a brief dip last December, accelerating rapidly through March, though the two lines appear to be closing slightly now. CP, on the other hand, has traded in the range of $23-$33 for the past 12 months and has remained equal to or slightly above the average except for a December dip.

What does it all mean? The 200-day moving average would seem to say if you're looking for excitement, go CN, which continues to enjoy a four-star rating from S&P. If you seek excitement along with some white knuckles, take UP where money is divided between "it can't get any worse" and something less encouraging. As for the remaining four, take your pick. The ride won't be exciting for the time being, but for the longer view it could be better than a bond.

The river as an alternative grain mover to the rails is getting some serious consideration in Congress as part of the STB reauthorization review. Frank Wilner reports in his excellent "Rail Merger Intelligence" newsletter that anticipater bumper crops envisage a good year for farmers, yet bad times for the rails. Having fewer class 1s and fewer cars is giving congress second thoughts about all the ISTEA money coming up. Maybe, some say, we ought to build better bigger locks and waterways to take the pressure of the rails.

Nor are the eastern roads off the hook. Both CSX and NS are major players in the so-called "broiler market," earning hundreds of millions of dollars a year in chicken feed. Some southern pols claim the rails "not only can't meet the needs [of poultry producers] but continue to raise rates as well." And so the cry goes round for increased subsidies to coast-wise shipping companies. (Unfortunately, these same pols haven't thought about what to do with all that grain when it arrives in Wilmington or Charleston or Norfolk.)

Wilner also reports that 90 % of ag facilities are served by just one railroad. While that may be so, there are still a whole lot of country elevators on shortlines connecting with two or more class 1. Here is where government can get creative. Some states, Like Pennsylvania, are aggressive and generous in providing grants and low-cost loans to shortline operators wanting to keep and build service to local industries - like country elevators. Other states are less generous. So, while the pols complain that "other countries are investing in rail systems and we cannot afford to let them undercut us," perhaps it's time to put some of that $170 billion ISTEA trust fund where their mouths are. Just ask folks like RailTex' Bruce Flohr or GNWR's Charlie Marshall what's possible.

As for Bruce Flohr, traffic lost due to UP's on-going problems didn't stop RTEX from having another record quarter. Revenues increased to $38.4 mm, a 12% year-to-year gain on a 16% increase in carloads (the bad news is more work for less money). Net income was up 58% to $2.5 mm. The consolidated operating ratio improved to 83.1 from the 85.2 posted in 1Q97. Separately RTEX reported a 7% increase in April 1998 carloads over last April. Results for "same railroad" were the same.

Three issues ago we reported Harmon's results for 1997 and suggested the annual as a good read. Well, they're at it again. The fist quarter was another record, with sales up 68% to $60.6 mm and a doubling of earnings to $2.8 million in 1Q97. The order backlog stands at $77.5 mm, up 28% from a year ago. Harmon says the pace "continues to be driven primarily by the North American freight railroad market. Railroad mergers have increased market demand for services and products as the railroads' operating systems are consolidated."

Carbuilder Johnstown America had $231 mm in sales, double 1Q97. Earnings before interest, taxes, depreciation and amortization in the current quarter were $39.5 mm (including $16.8 mm from the patent litigation settlement against Trinity), up from $12.6 million in the prior year. A company spokesman said "record quarterly performance was driven by substantially improved results from our freight car operations." Separately, Johnstown announced 200 UAW workers struck at its Gunite facility which makes wheel-end components for heavy-duty trucks.

Another good read is the latest 10-Q for MotivePower Industries. It says "the business strategy is to grow and continue to strengthen its core businesses." These are making and selling locomotive repair parts, providing locomotive fleet maintenance, overhauling and remanufacturing locomotives, and building power in the under-4000 HP range. Key components of the business plan are to capitalize on the railroads' desire to outsource certain repair functions and to grow its Mexican operations.

Other areas of interest are to increase off-shore sales, to acquire or joint- venture with complementary suppliers, and to build the non-railroad market. The strategy must be paying off, too. MotivePower doubled net income in the quarter over last year to $6.6 mm on sales of $82.9 mm, up 19%.

Norfolk Southern announced this week that it and CSX have been conditionally named to jointly operate the Staten Island Railroad. The railroad, which has been defunct for ten years, connects New York City's Staten Island to rail lines in New Jersey owned by Conrail. Jointly owned by New York City and New Jersey, the Staten Island Railroad when operational will provide dock-side rail service at the Howland Hook Marine Terminal.

The naming of NS and CSX should assure the Howland Hook terminal the same competitive rail service that terminals in Port Newark, NJ, and Elizabeth, NJ, will have after the Conrail transaction. New York is wrapping up an $11 million rehabilitation of the line in Staten Island and the Arthur Kill Lift bridge, which connects the line to New Jersey. New Jersey is expected to complete improvements on the line in its state by early 1999.

STB-watchers will recall that a month ago Ex Parte 575 was decided laying out tasks and timetables for the railroads to do certain things. The first deadline is Monday, 5/1, and it has to do with "smaller railroads" and certain obstacles that prevent them from getting full value out of all their class 1 connections. The obstacles, said the ruling, include so-called "paper barriers" keeping shortline A from class 1 B, inadequate car supply, and lack of alternative routings. In its decision, the STB said "we agree that smaller railroads represent an potentially significant resource in addressing the issues that concern shippers, and that to date their potential has been largely untapped."

The decision directs the parties "to address and resolve these issues and to report back to us on their progress in this regard by May 11, 1998." The ruling concludes by noting the STB is prepared to take action absent any action by the parties. Having been in the thick of the Conrail merger myself, I have watched many of these issues brew, and I've seen class 1s take steps to make them go away short of taking them to the Board. All it takes is a profit- based unemotional approach which has benefits for both sides. But it also takes clear direction from the top as to what actions are expected.

--Roy Blanchard

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