The Railroad Week in Review:
The mail continues on the publicity issue. Columnist Don Phillips writes from Washington, " Your latest newsletter makes a point that I've preached for years. Railroads just don't get it. They think that if they can keep the shippers reasonable mollified, take the analysts on tours and contribute the maximum to the right PACs, everything will be just fine. How unbelievably shortsighted. Maybe the public will catch up on the railroad revival before something happens to it for lack of public knowledge."
A major railroad supplier adds, "Mr. Blanchard, you are correct in your assumption of the public's perception of railroads. Having been in this business for 31+ years the comments regarding railroads are more negative now then back in the 60's. When my son was about 8 years old I went to his school to tell his fellow students what I did along with the important role the railroads play. Teachers were surprised to hear the comments I made regarding railroads. Most then and today think railroads are bankrupt and provide only a minuscule amount or transportation. I agree, we need to change the perception and we need to do it soon. About the only thing the general public hears about is the wrecks."
Genesee & Wyoming Inc. (Nasdaq: GNWR) has posted a seven cent a share loss for the quarter thanks to a number of factors. There was a decrease in revenues, costs related to the Company's unsuccessful V/Line Freight bid in Australia, and losses at its Canadian joint venture. With regard to V/Line Freight, bid costs high because of the requirement that the bid include unconditional financing.
Meanwhile GNWR has signed a letter of intent to increase its ownership in Genesee Rail-One Inc. (GRO), its Canadian joint venture, to 95%, and the Company will record its share of GRO's first quarter results at 95%. GRO's operating losses are expected to be $0.15 to $0.17 per share for the quarter including $0.07 per share in asset write-downs. Prospects for the future are good, says Mort Fuller.
For the year, it's a somewhat better story. Total sales were up 42.3% driven largely by the six-fold increase in Australian revenue. More important, the mix changed as Australia became nealrly a third of the total sales. The two other elements, US Revenues and US Switching, declined to 60% and 9% of the total respectively. Even more telling, the operating ratio of the Australian properties improved to 80.4 from 90.1 year-over year while the ORs for the two US operating companies got slightly worse. Canadian and Mexican operations are reported with the US numbers.
The Company continues to purchase stock under the repurchase program authorizing the repurchase of up to 1 mm shares. To date the Company has repurchased 510,000 shares. It's still a thinly-traded ticker, however, with roughly 55,000 shares changing hands daily. Of the 4.9 mm shares out, the float is about 2 mm, or $17 mm at today's prices. Float is the number of freely traded shares in the hands of the public. Float is calculated as Shares Outstanding minus Shares Owned by Insiders, 5% Owners, and "Rule 144" Shares.
Rip Watson poses a question fraught with meaning in Thursday's JOC. Who, he asks, gets the productivity benefits of the new series of 286,000 gross weight cars ("286s" for short) now showing up on most lines? The nub of the issue is that the larger cars carry about ten percent more payload so you can use ten percent fewer cars to carry the same amount of product. Grain merchandisers are the heaviest users of these cars, and when they can turn the cars quickly, the rails benefit by being able to use still fewer cars for a given volume. Thus discounted rates prevail.
The down side is that smaller players who can't load fifty or 100 cars a time, or who are located on branch lines unable to handle the larger cars, are often at a disadvantage. To be sure, there's a provision in the Railway Industry Agreement (RIA) between large and small railroads that increases small railroad allowances for the larger loads. But when the class 1s are discounting the larger cars to encourage use, what does that do to shortline economics? It encourages the customers of country elevators on shortlines or class 1 branch lines to go looking for larger elevators on trunk lines. The message is clear: lines that cannot take 286s will lose out. Shortliner emptor.
What if there were a railroad merger and nobody came? The kind of prize sought by CSX and NS in their expensive bid for Conrail's access to the New York City market may be the Booby Prize. According to Reuters, "The governors of New York and New Jersey have hit an impasse in a battle that could cause the loss of 1,000 jobs and the relocation of two high-visibility shippers out of the region." There is on the table a list of enticements both states would like to use to renew the leases of Sea-Land and Maersk Line. Both now use docks in NJ, and NY Governor Pataki has refused to approve the deal unless New York wins what he thinks is "a more equitable shore" of the revenue. For her part, NJ's Whitman says it's negotiable. Meanwhile, Baltimore, 150 miles to the south, has come up with a $200 mm package to settle everybody's hash.
RailTex, Inc. (Nasdaq: RTEX) increased March 1999 carloadings by 28% over March 1998 citing gains farm products, chemicals, autos, rock, coal and lumber. Year to date March 1999 carloadings were up 23% and include the recently acquired Central Properties, the Guelph Line that is operated as part of the Company's Goderich-Exeter Railway and the North Dallas Lines that are operated as part of the Dallas, Garland and Northeastern Railroad. On a "same railroad'' basis, carloadings increased by 24% for the month of March 1999 and 19% YTD.
We've written before about how states can support shortline operations through the use of infrastructure grants and how Pennsylvania is one of the leaders in this process. On Friday came word the Wheeling and Lake Erie Railway was awarded $900,000 for rehabilitating two railroad bridges. One bridge is in the West Liberty section of the City of Pittsburgh, where it crosses U.S. Truck Route 19. The other one is in Castle Shannon at PA Route 88. The steel lateral supports of the bridges are rusting, the concrete is decaying, and the bridge decks are deteriorating. Wheeling and Lake Erie officials say the improvements are necessary to keep the railroad's main line open. The project cost is estimated at $1.2 mm. Having the state pick up three quarters of a hit like this is most encouraging. Other states please take note.
The parts of the 10-K for RailAmerica (Nasdaq: RAIL) with the 1996-1998 revenue breakouts by rail and truck showed up in my fax machine last week. Back in 1996, there was no Ferronor (Chilean Railroad). That year the trailer manufacturing division generated 53.8% of sales, 21.5% of gross margin, and 43.5 of the pretax net. Also that year the railroad was operating on less than 60% of revenues and returning pretax net of 11.2% while trailers used up 90% of sales in producing the goods and returned only 7% in pretax net.
Then in 1997 Ferronor joined the fold with its OR in the low 80s and returning 12.5% in pretax net. Trailer gross margins rose to 17.2% % while pretax net more than doubled to 16.2%. US Rails saw the OR climb to 70 as the pretax net improved a point-plus to 12.9%. Over all, trailers slipped to 48.8% of total sales, increased to 38.0% of gross margin, and chalked up 54.7% of the pretax net.
And last year US rails revenue, gross margin (OR) and net remained essentially flat. Ferronor doubled its revenue base, improved gross margins to 28.3% (OR equivalent 71.7), but saw its pretax net drop to 9.9% of sales. The truck department retained its same gross and net percentages on a whopping 53% more sales. It also regained its leadership vis a vis the whole pie, capturing 55.4% of the revenues, 43.1% of the gross and an astounding 65.4% of the pretax net. Maybe some of those truck makers ought to be cloned and put to work on the railroad if they can produce sizeable double-digit returns like these.
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