The Railroad Week in Review:
Week Ending September 5, 1998

In yet another volatile week, the rails took another beating just like everybody else. The carnage was wide-spread, yet a quick look at rail stocks vs. their 200-day moving averages and present-day multiples vs. traditional multiples does show a few bright spots. Both Norfolk Southern (NYSE: NSC) and Union Pacific (NYSE: UNP) seem poised for a rebound. Norfolk has traded in a tight band essentially between 28 and 30 for the past month against a 200-day average of $31.75. Out west the Omaha Road has floated between $38 and $42 for the past month against a 200-say average of $53. And the road's vital signs are improving. So, while all the world was losing buckets of points, these two lost little. Something to do with ports in storms, I think.

Wisconsin Central (Nasdaq: WCLX) shed another 5/16 of a point Wednesday as 4.7 mm shares changed hands. That's 14 times the average daily volume on no news and a new PE of 8.74. Thursday Morgan Stanley raised its rating to Strong Buy from Outperform. The Thursday close of $14.50 (up a buck thirteen) is a mere 9.4 times the $1.54 per share estimate for 1998. Recall the industry trades at 15 times earnings, so this new low represents a 40% discount.

Kansas City Southern (NYSE: KSU) continued its downward spiral midweek. It dropped another 2 3/8 during the Tuesday sell-off, helped in part by a 1.4 mm share trade. Thursday KSU subsidiary DST Systems (NYSE: DST) agreed to acquire customer management software developer USCS International (Nasdaq: USCS).

The latter's stock surged $4 3/8 to $30 3/8 on the news while DST Systems plummeted $8 5/8 to $51 7/8. One reason for the drop could be some street sentiment that DST overpaid for the acquisition. Be that as it may, KSU, with its 41% stake in DST, fell another $1 15/16 to $31 7/8. As we've noted elsewhere, some of us wish KSU would get on with the rail side spin-off and let rail side president Mike Haverty et al do what they do best.

In that regard, a report from Rail StockWatch, a relatively new and highly informative letter from the west coast., notes that a spokesman for KSU said that the Internal Revenue Service has not yet ruled on KSU's proposed tax-free spin-off of its financial services unit. Assuming that a favorable ruling is forthcoming, and that the spin-off is accomplished, the company would then do a reverse stock split to make its stock price more attractive. A subsequent equity offering is planned to reduce the debt-equity ratio of the rail company.

One last thing on this: a long time Motley Fool correspondent, rail watcher, and investor writes, "There's definitely a dual thread going on here. One is that DST clearly overpaid in its offer, and DST's stock is getting pounded. That makes the sale of the remaining part less valuable than it was. The second is the savage beating that money managers are taking. With Traveler's Group (NYSE: TRV) off 47% from its high and American Express (NYSE: AXP) banging down 4 points per day, the values on Janus and Berger are relatively less attractive."

Union Pacific continues to make progress in its service improvement plan. For the five weeks ending 8/28, trains held for all reasons decreased 37%, for power down 20%, and for crews down 64%. Not too bad when you consider no appreciable change in the size of the loco fleet, an on-line car inventory right around 340,000 for the period, and a slight increase in terminal dwell time to 39 hours from 38 hours. In fact, this could en toto be some rather good news. Moving cars faster with no inventory change could mean they're going of-line as fast as they're coming on. Fewer trains held for power with no change in loco fleet means more trains per locomotive unit.

RailAmerica (Nasdaq: RAIL) reached agreement with a major investor group so that the latter may acquire up to 19.9% of RAIL's outstanding common stock. The group currently owns 15.9% of the shares and has said they will not participate in proxy contests adverse to the Company, take or attempt to take control of the Company, nor otherwise interfere with the current management or operations of the Company. p Meanwhile, RAIL has signed a long term operating lease with Ventura County Railroad in southern California. This is a 13-mile short line serving the Port of Hueneme and the Oxnard Harbor District in Oxnard and is estimated to carry about 4,000 cars a year. This will do a lot to boost RAIL's carloads-per mile, now one of the lowest in the industry. Also, I was with CEO Gary Marino, EVP Don Redfearn, and IR Director Wayne August on Tuesday. We talked a lot about the relative importance of the overseas and domestic opportunities and potential returns. Watch this space for the full report, especially about a parallel between the RAIL operation in Chile and what EWS is doing in England.

The Department of Transportation issued a press release Friday citing new regulations requiring "most trains to be equipped with radio systems or wireless communication devices." A new twist is the requirement that ROW workers like trackmen and signal maintainers also be non-wired. Said the release, the new rules bring modern communications technology to fields that have traditionally been without them.

Personally, I find this hard to believe. On every railroad I've ever had anything to do with train crews stayed in touch with each other and home base via two-way radios and increasingly cell phones. Same for track crews and signal workers. It's hard to imagine anybody putting out a track crew without some protecting track bulletin or warrant. It would be interesting to know what triggered this new regulation. Comments are invited.

Short Takes: Burlington Northern Santa Fe (NYSE: BNI) split 3:1 this week. It began the year at $31 (split-adjusted), made three runs at breaking 35, and has fallen back to $30 7/16 as of Friday....In the Barron's issued Saturday for next week, CSX (NYSE: CSX) was listed as 49th on a list of 50 high-yield stocks that may bee good bets to ride out the current storm. It was the only railroad on the list...The Dow Jones Transportation Index lost 7.5% last week as airline stocks ran into heavy weather. The index is down 20% YTD with only Southwest Airlines (NYSE: LUV) showing any gain at all, and only a couple bucks at that.

Amtrak has stepped up to the plate to take some of the strain off the travelling public grounded by Northwest Airlines, Northwest Airlink and Air Canada flights. The railroad is honoring the tickets of stranded passengers from each of the airlines and has added nearly 300 seats daily along the Amtrak route between the Northwest Airlines hub in Minneapolis/St. Paul and Chicago.

In the busy Northeast, Amtrak will add approximately 2,500 seats daily to its corridor trains (Newport News, Va.-Washington, D.C.,-Philadelphia-New York- Springfield, Mass.-Boston) over the Labor Day weekend will have additional trains on standby to accommodate the anticipated ridership demands.

Says an Amtrak press release, folks are increasingly turning to Amtrak to beat air and road congestion, not only during holiday times, but throughout the year. So far this fiscal year (October-June), Amtrak ridership has risen by more than six percent compared to last year -- the biggest gain in a decade. Amtrak projects that passenger revenue will top $1 billion this fiscal year for the first time -- a record.

Question is, when NWA et al begin flying again, how much share can Amtrak retain? It would be a great thing if we in the US of A should face the same "white space" problems faced by the Brits allotting track space to passenger and freight trains. But I'm afraid that until petrol reaches $4 a gallon here it's not too likely.

--Roy Blanchard

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