The Railroad Week in Review:
Earnings week began Wednesday with Canadian National checking in first. Quarterly net income nearly doubled to $182 mm from $95 mm for 4Q98 on five percent less revenue, $1,065 mm from $1,118 mm. Diluted 4Q98 eps were $1.88 compared with $1.10 ($1.29 for continuing operations) a year ago. For the year, CN earned $569 mm before special charges on $4.1 bn revenue. Last year the net before special charges was $439 on $4.3 bn revenue. So again we have a gain in earnings on a decrease in revenues.
From this one might say CN is at the stage seen by the US class ones about five years ago: still finding costs to take out of the operation, creating earnings increases on flat revenues, and still selling excess rail lines. Let's see what happens from here on out. (For the record, note that CN equity in IC earnings after interest was a plus $38 mm. Percentage-wise, that's not a whole lot. But it's certainly better than certain others on the continent at this stage of their mergers.)
On Thursday Union Pacific and CSX came to town. By most counts, UP pretty much did what they said they would. Estimates going in were around $0.30; they got $0.35, and if you add back three cents of one-time merger costs you get $0.38. Yes, the reported eps was ($0.77) however the difference was the decision not to write off Overnite just yet, so the UP took a $1.16 credit to undo the 2Q98 discontinued operations charge that what brings 'em into the black.
The NY presentation was well done, I think, and it pointed out many areas of rail operating improvement, all of which you can see at www.uprr.com. And though it's one thing to get costs under control, it's quite another to regain lost revenue. UP's stated near-term charge is to recapture the nearly 100,000 chemical carloads lost to competitors in 1998. The average revenue per chemical car is slightly more than $1,700 so we're not exactly talking pocket change. I wish them well, and, BTW, the stock hit $50 a share this week, back nicely from the abyss.
CSX has some disappointing numbers. Revenue for the quarter - after allowance for the barge line -- was essentially flat for the year and the quarter, but expenses got away driving operating income down 33% for the quarter and 23% for the year. As a result earnings got cut nearly in half, to 51 cents from 99 cents a share for the quarter and by a third for the year. The good news is that the CR infrastructure and staffing expense bulge will pass soon, leaving the company in good shape to capitalize on the capital committed to Conrail.
Speaking of which, Split Date is now set for June 1, with both CSX and NS concurring. Customer service planning, capital improvement projects, employee training and labor implementing agreements are now largely complete. (TWU is out for arbitration; give it 30-45 days.) After Closing, Norfolk Southern will operate about 7,200 miles of Conrail routes, creating a 21,600-mile rail system serving 22 states. CSX will operate approximately 4,000 miles of Conrail routes, resulting in a 22,300-mile rail system serving 23 states. Why June 1? March 1 couldn't happen, April 1 is April Fools Day as well as Conrail and Amtrak anniversaries, and May Day is a distress call. Clear enough?
The AAR annual report of carloads and commodities by railroad makes some enlightening reading, both in terms of who gained and lost what and in terms of absolute carloads 1998 v. 1997. In terms of sheer carloads, UNP retains first place with 4.2 mm. Then comes BNSF (3.9), CSX (3.8) and NS (2.5). CSX slipped to second spot from third while BNSF went from three to two.
In chemicals, UNP stayed number one, CSX and CN swapped two and three with the former the gainer, and BNSF stayed fourth. BNSF keeps the coal catbird seat followed by UNP, CSX, and NS respectively, no change from last year. The grain honors also go to BNSF again in 1998, with UNP and CP staying second and third. CN gave up its Four Spot to NS. Norfolk also glommed the number one position away from CR (slipping to fourth) in the all-important motor vehicle market, though how much of that is pre-merger shift is not clear from the tables. CSX captures second from CN and UNP moved up to third from fourth. The intermodal ranks remain BNSF, UNP, CR, and NS.
The good news to shortline operators is the heftiest percentage gains were all in carload business as opposed to the TOFC/COFC trade. One anomaly is CR being up 34% in grain, the very product CR demarketed by selling off its covered hopper fleet some years ago. Not unexpectedly, CSX and NS were up 7% and 4% in grain respectively. Midwestern shortlines take note.
Sources at Florida East Coast (FEC) have confirmed that IG Holdings is the same group that made the run at P&W and has done this to other companies as well. It would seem that at this point the SEC might begin to be interested. One correspondent who follows the New England rail scene writes, "It is incidental that they chose PWX. Or FEC. They do this for a living. Apparently there are two principals, both from real estate backgrounds. Since a brokerage is duty-bound to transfer any material information to shareholders, by making these below-market tenders the information is transmitted, without comment, but with the implied authority of a brokerage firm-letterhead and such. Anything they scoop up (typically from widows and orphans) is found money."
RaiLink (TSE: RLK, WIR 1/16) holds a 27 per cent ownership interest, and was a founding shareholder in, affiliate Quebec Railway Corporation (QRC) which - in strong partnership with CN - has become the regional railway leader in Quebec and the Maritimes. The RaiLink website (www.railink.com) is most informative, with maps, profiles, and philosophy sprinkled throughout. Of particular interest to railroad investors, as of the end of Q398 RLK sports an operating ratio in the mid-80s and EBITDA/interest coverage ratio of about ten. Long term debt is around 44% of equity and 31% of capitalization. With $22 mm cash in its corporate jeans, RLK is well-positioned to buy more properties so, naturally, RLK will -- in conjunction with QRC -- buy the ferry operation connecting both shores of the St Lawrence River at Matane/Baie Comeau.
NS and Amtrak are making progress in their talks re NS freight on the Northeast Corridor (NEC) after Split Date. This is good news. NS included certain upgrades to make better use of the NEC in its original filing with the STB, including putting the second track on the highline west of Philadelphia's 30th Street Station. Using the NEC for time-sensitive shipments and RoadRailers between NYC and the southeast certainly makes more sense than running via Harrisburg and Hagerstown. It is estimated that the NY-Atlanta run could be cut to 26 hours from the present 34 hours. The scheme also means several $millions for Amtrak, surely a welcome sight in its quest to become self-sufficient by the end of 2002.
One of the most rewarding aspects of publishing this weekly Review is reading the mail it draws. A regular, who is also a senior dispatcher with one of the Big Four, writes, "After watching the Christmas sales increases on the Internet, the increase of some package deliveries by UPS and Federal Express, I began to wonder what the impact on the railroads were. Almost everything bought over the Internet has to be shipped someplace. One road shipped more than 31,000 containers or trailers during the peak season from the first weekend after Thanksgiving to the day before Christmas. Each container or trailer is estimated to have 1800 to 2000 packages BNSF for one delivered eveything on time according to a UPS spokesperson. The railroads I believe are in a very good if not a unique position to exploit the growing TOFC/COFC traffic created by the Internet." Makes sense to me. Anybody got any ideas how to track it?
In closing, it's pretty much a given none of us will make a lot of money in class 1 railroad stocks this year. But how about the vendors? Solid gains in '98 came from Wabco (NYSE: WAB, up 73%), MotivePower (NYSE: MPO, up 53%), Johnstown (Nasdaq: JAII, up 46%) and Harmon (Nasdaq: HRMN, up 22%). Out of this group my money for 1999 would be on MPO. The company does business with about every railroad and rail transit company on the continent, has good momentum, and there's no reason to see that slowing this year. Also for 1999 I will add Varlen back to the mix for its growing rail presence and Foster for its DM&E involvement. Timken, Alsthom and Alcatel will fall out as rail is such a small portion of its mix. Of course, I'm always open to suggestion.
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