The Railroad Week in Review:
Week Ending November 7, 1998

The week was chock full of news and results from our favorite class 3 railroad operators. Emons Transportation Group (Nasdaq: EMON) posted fiscal 1Q99 results showing a 24% increase in operating revenues, a doubling of net income, and a tripling of income before taxes. Operating revenues increased 24% to $5.1 mm from $4.1 mm for the fiscal 1998 first quarter. This 24% revenue increase was driven by 27% more carloads and 27% more revenues, less a slight fall-off in intermodal. In other words, per-car yields kept pace. Also, EMON expects to complete the acquisition of 94 miles of track in Quebec from Canadian National (NYSE: CNI) before calendar year end. Recall that EMON reported an exceptional FY1998 [WIR 9/19/98] so it is doubly gratifying to see this kind of continuing momentum.

Genesee & Wyoming Inc. (Nasdaq: GNWR) rang up 3Q98 operating revenues of $34.7 mm, up 47% over the prior year period. Operating income of $4.1 million for the 1998 quarter was up 6.1 percent from the $3.9 million reported for the 1997 quarter. GNWR said the quarter's numbers "reflect several adverse short- term revenue- related events." Coal was down 10% and carloads of petroleum products were down 24.4% from the year ago quarter. Evidently several major customers in both industries had had maintenance shut-downs and inventory adjustments so revenue from these customers returned to normal levels during September. Diluted eps dropped 11% YTD and interest coverage dropped to four times from seven times a year ago.

Australia continued to perform above expectations with results for the third quarter matching the second quarter, more than offsetting the significant increase in interest expense to $1.8 mm vs. $629,000 in the same quarter of 1997. The increased borrowings were mostly used to finance the Australian operation. In Canada Genesee Rail-One (GRO) has reached an agreement in principle to acquire 364 miles of track in northwestern Alberta from CNI. Finally, GNWR has a memorandum of understanding (MOU) to purchase about 30% of the stock of a Chilean company which owns operating railroad interests in Chile and Bolivia. The MOU calls for $8 million in cash and approximately 350,000 shares of GWNR common stock. Both acquisitions are conditional on due diligence and documentation.

GNWR, it should be noted, is no new-comer. Back in 1899 the Genesee & Wyoming was founded as a 14-mile railroad in upstate NY. Today GNWR operates more than 3,900 miles of track in four countries on two continents. The original G&W was essentially stopped in its tracks in 1994 when salt mining - its major industry -- ceased following a mine collapse. Well, it's back to the salt mines again. A new operator, American Rock Salt, has closed on its financing and will move forward with construction of a new salt mine along the original G&W.

Present wobbles notwithstanding, GNWR remains a strong contender for rail investors' serious consideration. The 9/30 balance sheet tells the tale. Cash was down $5 mm YTD but so was long term debt. Receivables and inventory declined by $3 mm offset by current portion of LTD plus accounts payable. The current ratio improved 6% to 1.57 from 1.49. Net cash from operating activities came in at $11 mm, a $13 mm improvement from 97's negative $2 mm.

Providence & Worcester (AMEX: PWX) this week blew off an unsolicited tender offer to purchase up to 2% of the shares of PWX at a price of $7.85 per share. Not only did the perpetrator not inform PWX, but the offering price is a third less than the current trading level. The railroad said in a press release that the offeror "has not disclosed any facts concerning its identity, its financial condition or its resources."

RailAmerica (Nasdaq: RAIL) has posted results for 3Q98 and 1998 YTD to 9/30. Rail revenues jumped 50% for the quarter and 37% YTD over 1997 on carload increases of 71% for the quarter and 78% YTD. The growth in carloadings was primarily attributable to shipments from newly-opened mines served by the Company's Chilean railroad (Ferronor) and increased domestic shipments of agricultural commodities and coal.

Ferronor benefited from new traffic and more efficient operations, lowering its year-to-date operating ratio to 72.6, down from a woeful 105 prior to the RAIL acquisition in early 1997. Going forward, domestic rail properties are forecasting a steady growth in carloadings due in part to a solid agricultural harvest in the areas served by its Midwestern railroads, while Ferronor's future results should be bolstered by the addition of two sizable long-term mining transportation contracts that commenced this quarter.

Kalyn/Siebert, the truck trailer manufacturing subsidiary, grew revenues 62% to $10.1 mm in the third quarter, and 83% to $29.8 mm through the first nine months of 1998. Putting it in perspective, rails did 8.9 mm in 3Q98 and $21.4 mm YTD. Which means the rail share of the corporate pie is increasing. Exactly what CEO Gary Mario said he'd do.

RailTex (Nasdaq: RTEX) has agreed to sell 49.5% of its interest in its Brazilian railroad investments to a Washington, DC-based investment fund for $11 mm. Proceeds from the transaction will be used to reduce RailTex's senior credit facilities and for general corporate purposes. Closing of the transaction is expected prior to year end.

Newly-appointed CEO Ron Rittenmeyer said it's "prudent for RailTex to reduce its Brazilian investments and redeploy that capital to other areas, including debt reduction." RailTex will record a $2.0 million gain ($0.13 per share) on the transaction.

Relative newcomer to the US rail vendor scene - at least for trading -- is ALSTOM (NYSE: ALS). The Paris-based firm started trading in June (opened at $US 33 9/16) and specializes in the contracting of infrastructure construction projects for power generation, transmission and distribution, and transport. For the fiscal year ended 3/31/98, net sales were FF 73.44 billion ($US 13.44 bn). The North American facility is based in Montreal and has just been awarded a multimillion-dollar contract to assemble, paint and test 35 new locomotives for the EMD unit of General Motors (NYSE: GM). The SD75I units will be delivered in mid-99 for use on Canadian National.

Author, raconteur, and fellow rail-watcher Larry DeYoung writes regarding the recent thread on efficient operations: "In 1992 or thereabouts, [there was] a survey which showed that existing rail shippers will pay a growing increment as (if) railroad reliability improves. This does not even consider the lost customers who could be wooed back and the never-been-a-rail-users who could be convinced if service were made >>truly<< reliable.

"The railroads still think they are labor intensive. Wrong! They have so few employees they aren't even a blip on the Department of Labor's statistics anymore. They are capital asset intensive, and they need to manage those assets better. I amazes me that Amtrak is going to be turning reefers five times a month coast-to-coast, but [the freight roads say they] can't afford to buy reefers because they accept as a given (why?) that the cars only turn once a month.

"Meanwhile, shippers pay PLENTY to airfreight (!) strawberries from the west coast. The Santa Fe and the Erie used to handle that traffic, 25-30 cars at a time California to New York, on expedited passenger train schedules, no classification en-route. It makes one ask why can't BNSF and CR do that today and charge enough to make it profitable." To which I can only add that shippers at the recent Newark (NJ) AAR "Town Meeting" didn't say much about rates, but consistency of service? You bet they had a lot to say. Pretty forceful stuff.

There's got to be a better way. For some time now I've been harping on the importance of increasing revenue per car. Yet, as CSX' John Giles points out [WIR 10/31], short haul unit trains of low-revenue commodities can make money even as they drag down average revenue per car. So total revenue divided by total cars may not be the whole answer. The answer could be in deciding whether the production unit is the car or the train. But if you rely on revenue per train start economics would point away from short fast trains, exactly the solution many shippers need. Any ideas?

Lastly, a brief quiz. I bought Kansas City Southern (NYSE: KSU) for $49 last spring, hoping to make a few dollars on the rail spin-off. That has not happened, and is not likely to happen for a while. The stock has recovered very well from its Asian Flu fall in July, however it is out of my time frame and time to move on. I have an option out to sell it for $45 in December. Assuming the stock is called away I will make $8 on the sale. How is this possible?

--Roy Blanchard

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