The Railroad Week in Review:
Week Ending August 8, 1998

The brightest spot in Tuesday's Railway Rout was Wisconsin Central (Nasdaq: WCLX), which gained $0.32 to close at $20.13. Monday's earnings announcement helped, putting the US operation at a record $23.9 mm for 2Q98, an increase of 13.2% from 2Q97. The company's North American operating ratio for the second quarter of 1998 was 71.8 compared to 75.1 a year ago. But the stock price is still off 14% YTD. Canadian National (NYSE: CNI) was least scathed, escaping with a mere quarter of a percent drop, off 1/8 to $52.06. Another relative bright spot was Kansas City Southern Industries (NYSE: KSU). Yes, it was off nearly 2% to close at 45.94, yet it's till comfortably above its 200-day moving average.

Leader in the loss column was small-cap Genesee & Wyoming (Nasdaq: GNWR) which derailed to the tune of 25%, dropping $4 5/8 to $15 1/4. Why? For missing First Call Estimates by that much, reporting fiscal Q2 EPS of $0.34 against estimates of $0.45. I'll have further details and analysis on the GNWR earnings picture next week. I would not rush out and dump my Genesee shares just yet, however. Sometimes the earnings-watchers miss the larger picture, which includes asset management and business development.

Followers of the shortline business know well that car supply and transloads are major factors in that larger picture. GNWR has addressed both quite nicely on its Quebec Gatineau Railway (QGR). In March they opened an auto distribution facility in Quebec City. Chrysler is the first user projecting enough volume to fill 1,700 bi-and tri-level cars annually. QGR is also in the final stages of opening up two lumber truck-rail reloads, one at each end of its railroad. Finally, to accommodate a growing list of paper customers QGR took delivery of 200 new plate F, 100-ton boxcars leased from Railcar Ltd. These cars will replace a larger fleet of older plate C, 70-tonners.

There are those who say KSU has lost out in the Texas market now that the STB has ruled Union Pacific (NYSE: UNP) has matters in hand. Others aren't so sure. One insider confided to me, "UNP Customers continue to have many problems in Texas and in Southern California. The railroad enlisted a number of political allies for the STB decision on Houston, trying to dispel any thoughts that changes might be needed." UNP shed another $0.82 Wednesday, bringing its YTD loss to 35%. Now trading about 18 points below its 200-day average, this is a stock that has lost nearly half its value in the past 12 months. Is it a bargain yet?

There was an intriguing bit of UNP analysis in The Motley Fool a while back. It read, "With Union Pacific trading at 7 times cash flow and 1.05 times depressed trailing sales, and with the industry averages at 12.9 times and 2 times those numbers respectively, value investors have been taking a closer look at the country's largest railroad. The promise of last September's merger has yet to be realized of course. Buying Southern Pacific's 14,000 miles of track gave Union Pacific a shortcut between Texas and California and a direct route from San Francisco to Los Angeles, as well as the business of numerous petrochemical companies along the Gulf Coast (which it has managed to infuriate over the last year).

"Interested investors should balance the length of time that it takes for the logjam to clear up versus the captive shipper situation in Union Pacific's markets. Even enraged plastic makers can't stay mad long enough to continue paying four times Union Pacific's per-ton mile price to have trucks ship their plastic pellets." In other words, watch both the numbers and the economics before you make a move in or out.

Emons Transportation Group (Nasdaq: EMON) is expanding. The company has announced an agreement in principle with CNI to acquire 94 miles of rail line in Quebec. The transaction, a modest $7 mm (Canadian), will connect Emons' St Lawrence & Atlantic unit at the Vermont/Canada border with the CNI main outside Montreal. I've taken a close look at the transaction and it is easy to see how it fits Chairman Robert Grossman's "contiguous railroad" strategy. Clearly EMON is doing a lot of right things.

Greenbrier (NYSE: GBX) had a strong third fiscal quarter, posting diluted earnings of $0.38, up from $0.06 a year ago after a charge of $0.03 for discontinued operations. Revenues for the quarter were $150.7 mm, up 82% from the prior year's $82.6 mm For the fiscal nine months, diluted per share earnings were $0.97 vs. $0.42 a year ago. The May 31 backlog was down slightly to 5,300 cars at $289 mm from 6,700 cars at $335 mm on Feb 28. The company says new rail car deliveries and improved margins contributed to the gains. Backlogs are expected to remain "at historically high levels into 1999."

Rail Stocks YTD have not done nearly so well as they did least year. For the first seven months of this year, rail stocks as a whole are off 7.56% vs. the DJIA up 8.09% and the transports up 1.09%. Not surprisingly, Kansas City Southern (NYSE: KSU) led the pack on the plus side, up a split-adjusted 55%, largely driven by the pending division of its rail and financial units. Note too that in July KSU had been run up as high as $57.43 before falling back to close at $49.13.

Back in the real world, only Canadian National (NYSE: CNI) and Burlington Northern Santa Fe (NYSE: BNI) had stories to tell, up 12% and 11% respectively. At the other end of the scale, Union Pacific (NYSE: UNP) continued its downward drift, closing out the month at $42, just 6% above its all-time low of $39.43. The STB ruling "that rail service in the Houston area had improved significantly and it would wind down its emergency service order against UNP" (Reuters) appears to have sparked the reversal. Still, UNP is off 40% for the year.

Another big YTD loser is CSX Corporation (NYSE: CSX), off 25%. Contributing to this malaise is its Sea Land exposure on the Pacific Rim plus its exposure to near-term, Conrail-specific items. By comparison, merger partner and competitor Norfolk Southern (NYSE: NSC) is off just 2% for the year. RailTex (Nasdaq: RTEX) and Wisconsin Central (Nasdaq: WCLX) continue to puzzle. RTEX announced 2Q results this week, details and analysis to come next week. Also, RTEX has finally announced selection of a new President to succeed founder and CEO Bruce Flohr who is seeking to wind down his long and successful rail career.

WCLX is sheer enigma. One of my analyst friends in NY said to me the other day she finds its stock performance "disappointing," yet can't fathom any real basis for it. The 52-week low is $19.75, it closed Friday 7/31 at $20.54, and has a 52-week high at $35.25. It's trading about 400 basis points below its 200-day moving average, has signed a deal with CNI to link the latter with its new IC partner, and the Great Britain operation seems sound. Surely the Wisconsinites can't be taking all this heat for Asia, to which their exposure is more a function of geography than fact. I wish I knew.

Concerning new NS yards in Penna. and NY (WIR, 8/1/98), Jim McClellan, newly tapped SVP Planning at NS, writes, "To set the record straight, the yards would be intermodal yards and there is no firm plan for either at this time. But the IM group is thinking that some additional capacity may be required to serve northeast given constraints on land use and track access in north Jersey."

CP's Jayne Phillips, also a planning type, reminds us, "There was a piece of Pennsylvania legislation recently approved by Governor Ridge (Senate Bill 185) which contains $2.2 mm for construction of intermodal rail freight facilities. This bill represents the first major use of highway capital dollars for railroad purposes." My personal take, having watched this merger grow and take shape, is that any such facilities will be strictly intermodal and that carload business - especially to and from area shortlines - will not be affected.

In Memoriam. Ben Friedland, President and General Manager of New Jersey's Morristown & Erie Railway passed away Monday evening suddenly and without warning. Ben was probably one of the best friends many of us will ever have. He will be sorely missed. (For those of you wishing to make some contribution, the family has named a number of charities. E-mail me for details.)

--Roy Blanchard

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