The Railroad Week in Review:
Week Ending August 15, 1998

What ails Wisconsin Central (Nasdaq: WCLX) investors? I still have no clues. This week brought a press release about Tranz Rail Holdings Ltd. (TRH), New Zealand's only commercial railroad owner, in which WCLX has a 23% equity interest. Said the report, TRH profits for the quarter were off 29% "reflecting the impact of Asia's turmoil on bulk goods such as forestry and coal."

The railroad said it expects earnings before interest and tax to be "little changed" in the current year at about NZ$70 million, though interest costs and depreciation are likely to be higher given the company increased its debt levels through the purchase of assets.

Now before we all rush for the exits, put this in context. WCLX net income for the first half of 1998 was $39.5 mm vs. $38.3 mm a year ago. Combined equity contributions from Great Britain's English Welsh & Scottish Railway and TRH amounted to $16.9 mm, or 42.8% of the total net. TRH contributed only 8.6%.

Granted, this is a change from last year when the first half WCLX net was but $38.3 mm, making the 1998 number a 3% gain. However last year the off-shores contributed $20.2 mm or 52.7% of the total. TRH accounted for 5.6% of the total last year with EWS chipping in 14.6%. Does the mix look familiar? It ought to: investment gooroos tell us to invest in off-shore equities as well in the US so when one is down the other is up. Could Ed Burkhardt & Co. be trying to tell us something?

RailTex (Nasdaq: RTEX) earnings for 2Q98 and the half increased slightly over the previous periods. For the quarter, carloads were up 10% and revenues 5%, indicating a further deterioration in yield. Earnings increased 4% even as improvements in the operating ratio were offset by derailment costs. For the half, carloads rose 13% while revenue was up just 8%. Earnings increased 23% to $0.54 per basic and diluted share. Missing from the report is the usual (for RTEX) comparison of "same store" results, which is especially helpful for an acquisitive company like this.

The half-dozen brokers following RTEX rank the shares a "moderate buy" (Zacks) with a 2.14 based on estimated earnings growth for this year and next 22% and 17% respectively. RTEX has finally tapped a new president, Ron Rittenmyer, whose resume includes a stint as COO of the Burlington Northern Santa Fe and logistics work with Frito-Lay and Ryder. Rittenmyer joins the firm 8/24 as Bruce Flohr continues as Chairman. The decent estimates and the fleshing out of the management team ought now let the shares begin to rise to a more appropriate level, say around $24.

Genesee & Wyoming (Nasdaq: GNWR) will repurchase up to a million shares of its Class A Common Stock in the open market over some unidentified period. With only 5.3 mm shares out and an average daily volume of 25,000 it's pretty thin already (see below). By way of comparison, Providence & Worcester (Amex: PWX) has 3.4 mm shares and RailAmerica (Nasdaq: RAIL) has 9.5 mm shares outstanding.

On the west coast GNWR's Portland & Western as completed its million-dollar bridge project to link two properties, opening a badly-needed rail route for crushed stone. And, for what it's worth, the Yahoo! Finance page lists GNWR as having the strongest recommendation in the biz with three times the industry eps growth predicted for 1998 and another 18% for 1999. It may be only two brokers, but at least it's a following.

Regular observers of the railway investment scene have remarked in a series of visits, calls, and e-mails that shortline and regional rail shares seem to be taking more than their share of the beating this year. Seems to me they're all being tarred with the same brush as the class 1s. Unfortunately, those carrying the tar don't always understand the shortline business model.

In the August 10 WSJ "Heard on the Street" there was an intriguing piece on good values in regional airlines because they are not affected by the Asia biz the way an NWA or AMR might be. The shoe fits regional rails as well. Theirs is primarily carload business feeding the class 1s with commodities that are largely manufactured/grown/mined and consumed in/on this continent. It makes one wonder who's doing the homework.

An investment-banking friend writes, "The recent $4 drop in GNWR shares may have been driven by Bloomberg headlines coupled with a lack of liquidity in the market for their stock plus little research following. Investors evidently ran for the exits before they really read the Company's earnings announcement. Fundamentally GNWR is sound; increased interest expense was the principle culprit for lower net. Aussie dollar weakness hurts, but AS by all accounts is doing fine. CommEd is suing I&M but I agree with [GNWR Chairman] Mort [Fuller] who stated that Edison is positioning to maximize the value of Powerton.

"I wasn't convinced that the market understood regional railroads when RTEX, WCLX and GNWR were higher fliers. I think they were just lumped into the small cap growth category and the earnings momentum players bid them up. So as earnings growth slows, they run. The market may also assume that because a transportation "blue chip" like UNP is in trouble, it must be really bad for smaller railroads. The sell-off in the regionals is just another example of the superficiality of much of the investor (and research) community. For those who understand this industry and understand how the regionals create value this sell-off represents a buying opportunity. I'd be buying if I could, and that includes [selections omitted]."

Subscribers to the WSJ Interactive Edition ( may also sign up for Barron's Weekday Trader which on Tuesday treated us with a thoughtful write-up on the troubles at Union Pacific (NYSE: UNP). Readers who missed it can see it at the Barron's site ( via the "Weekday Trader" link. Writer Vito Racanelli quotes a number of leading analysts and concludes that in the 12-24 month time frame "the downside appears limited, and, longer term, value investors should find the shares hard to resist."

PWX announced earnings last week. Operating revenues for 2Q98 rose $313,000 or 5.6% while other income, income generated primarily from the sale of properties, easements and licenses, rose to $2.4 million in 1998 from $250,000 a year ago. Income from operations fell 4.4% to $787,000 in 1998 from $823,000 in 1997. This decrease is due mainly to a $220,000 increase in profit sharing expenses resulting from the asset sales. Excluding profit sharing, income rose 22% to $1.0 million from $823,000 in 1997 Earnings per share (diluted) on net income of $1.8 million increased to $.51, after the net extraordinary loss of $170,000 from early retirement of debt, from $.19 in 1997.

For the half operating revenues were up 5% from a year ago and income from operations rose 6%. Excluding profit sharing, income from operations rose 28% while earnings per diluted share increased to $.66 after debt retirement. The second half ought to offer some excitement as PWX President Orville Harrold has promised to pursue his merger-related gain (expanded rights to Fresh Pond) and loss (ownership of the New Haven passenger station). Harrold also writes of progress on settlement of the Best Foods action which could be worth $1.8 mm.

Finally, Jim Blaze writes that if CSX and NSC are as successful in diverting truck traffic to their rails post-merger as they say they will, another 2000 acres of intermodal terminal space will be required in the NYC area. Trouble is, there's no room. So Pennsylvania's $2.2 mm capital item for an intermodal terminal (see WIR for last week) makes even more sense. Especially since, as columnist and STB-watcher Frank Wilner notes in his "Rail Intelligence" newsletter, Jersey City has opted for tax revenues over logistics as they sold

--Roy Blanchard

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