The Railroad Week in Review:
Week Ending June 20, 1998

It never rains but it pours. A cheap yen increases imports and the need for rail transport from the western ports and where are the rails? Strained to the gills. Last month imports from Asia were up more than 20 percent over last year. Long Beach was up 14 percent and LA jumped almost 27 percent. Long Beach and LA are up 17 and 19 percent YTD, respectively.

The booming business in boxes is a challenge to Burlington Northern Santa Fe (NYSE: BNI) and Union Pacific (NYSE: UNP), to say the least. And a BNI derailment last week on a line both carriers use didn't help. The railroads were already scrambling to find sufficient equipment and personnel to move the increased business, at a time when Union Pacific is still trying to recover from what may be the worst rail freight traffic jam in U.S. history. BNI shares closed the week at $99 3/16, up a buck for the week. UNP shares lost another $2.50 this week, closing at $43.75.

Meanwhile, UNP is beginning to feel the strain of the GM labor showdown. It serves four plants, all closed. Also feeling the GM strike are Canadian National (NYSE: CNI), which serves nine plants, Norfolk Southern (NYSE: NSC) and CSX Transportation (NYSE: CSX). As an aside, an article in Friday's WSJ quotes the mayor of Flint, Mich., home of the initial GM strike, that employment levels continue rise as GM manufacturing jobs are replaced with research and services. Not good news for the rails.

UNP also has had an effect on the copper business with half a dozen major copper producers citing certain woes associated with railroad problems in the southwest and Mexico. Asarco has cut smelter production while Phelps Dodge is trying to keep its 380,000 ton-per-year refinery in El Paso operating.

CNI is ahead of the curve this year in both loading at country elevators and port unloading. The principle ports -- Vancouver, Prince Rupert, Thunder Bay -- unloaded 1,662 CNI grain cars during crop week 45 --- 103 per cent of industry-set guidelines. CNI placed 2,575 cars at country elevators for loading during crop week 45. This week, CNI plans to place 2,007 across Western Canada.

Analysts speak: Gruntal's Steve Lewins gives NSC a strong buy and CSX a hold. He's trimmed estimates on both due to the GM strike...Merrill Lynch continues to show Canadian Pacific (NYSE: CP) as an "accumulate" candidate...Jim Higgins at DLJ continues to call Wisconsin Central (Nasdaq: WCLX) a buy with a 12-month target of $28.

The other shoe has finally dropped on the question of will Wisconsin Central get CNI's overhead business or will it not? It will. With some fanfare both companies this week trumpeted the inking of a deal that concluded a long-term agreement under which WCLX will provide haulage services for CNI's carload and bulk commodity trains between Superior, Wis., and Chicago, Ill. The agreement is for not less than 20 years and is renewable. QED.

In this space just recently we held forth on the subject of dividends, using Emons Transportation (Nasdaq: EMON) as a case in point. News comes that EMON will omit its July 1 preferred dividend. The total dividend arrearage will be $1.7 mm or $1.12 a share.

Over in vendor-land, all's quiet, so it might be worth our while to take another look at ABC Rail (Nasdaq: ABCR). The most recent report was done back in March by Morgan Keegan, who pitched it as a BUY thanks to "outsourcing of non-core operations and infrastructure upgrades." Moreover, the report noted "the firm appears to be in a solid position to take advantage of the changing rail industry via acquisitions and joint ventures."

There seems to be some support. Zacks shows a consensus pointing to triple- digit increases in earnings for the next two quarters and for the year. Earnings growth rates for the near future are handily ahead of the company's peers and the S&P. So why is the stock down 17.5% YTD? The six analysts following the stock are generally bearish and over the past 90 days forward earnings estimates have declined.

The most recent quarterly report shows margins increasing to 12.6% from 8.4% and for nine months to 11.5% from 10.9%. Interest, even up 43% YTD, remains a modest 17% of gross income. For the past year the 200-day moving average has stayed between $18 and $19, so the most recent lose at $16 is decidedly off course. What gets me is that here we have the pre-eminent supplier of track components (never mind wheels for the nonce) in a transit- and rail-friendly political environment and the stock can't get out of its own way. This may bear more study.

Philadelphia's SEPTA bus and trolley strike is in its third week, and we all seem to be doing very well, thank you very much. Traffic moves more smoothly, even if there's more of it, bicycle usage has increased, and ridership on the commuter rail lines is up. Interestingly for those of us familiar with the FRA'a drug-testing rules, one issue is whether a first positive drug test on an operator could be waived. It's a stressful job, they say.

The Delaware Valley Regional Planning Commission (DVRPC), the area's MPO, has released a very revealing congestion study which speaks volumes about public transportation patterns here. From 1990 to 1996 population in the region grew just 0.7% while vehicle ownership increased 5%. SEPTA ridership declined 12% and the high speed line to NJ lost 6% of its riders. Conversely, New Jersey Transit trains and buses serving the area attracted 9% more riders in the same period. I'll let you draw your own conclusions.

The span of control thread continues. Another class 1 friend writes, "I am always amused about discussions concerning the size of the current railroad business and how it makes things simply too large to manage.

"A couple of reference points: Remember how large railroads were forty and fifty years ago in terms of activity and numbers of folks employed. I know the old Norfolk and Western in 1955 had 20,000 employees on a property that stretched only from Norfolk to Columbus, OH. This was the result of continued reliance on steam at that late date as well as a lot of passenger service.

"And if I recall, the Pennsylvania Railroad had over 100,000 employees in the WWII and post war period. It actually ran with far more reliability than much smaller systems today (although arrogance and lack of courtesy were also well- developed traits).

"Obviously, many of our major customers have revenues far in excess of any one railroad and many have revenues many times that of the entire railroad business. And now it's not unusual for a firm to have global operations in a variety of languages and cultures to boot. Which makes the STB's recent concerns about some rail employees having to relocate from the Northeast to the Southeast seem rather out of touch with modern commercial reality.

"Hell, even England managed to control 25% of the land mass of the world for several hundred years relying on ocean vessels and some pretty aggressive local superintendents. Of course, there were the usual armed troops by the thousand to fend off hostile populations by the million. To say the least, the English managers required a lot of moxie to pull off.

"Bottom line: any discussion of size must be related to the complexity of the business (which in terms of carloads handled or switched or passengers handled ain't too great for current Class I carriers). If we can't handle size, it is because we are not organized to do so, not because things are too complex." Amen to that.

--Roy Blanchard

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