The Railroad Week in Review:
Week Ending April 17, 1999

Earnings Week in NYC begins this week. First up is Burlington Northern Santa Fe (NYSE: BNI) on Tuesday. Union Pacific (NYSE: UNP) comes to town Thursday and CSX (NYSE: CSX) closes the week out on Friday. Estimates are BNI $0.56, up from $0.49 in 1Q98, UNP $0.45, up from a loss of $0.18 a year ago. CSX continues to weather stormy seas with its SeaLand unit, calling for $0.32 against $0.41 for 1Q98.

Apropos of earnings, here we see the major US rails posting small gains in 1998 earnings on even smaller gains in revenues while their smaller cousins are doing much better. Revenue changes ranged from a positive 6.8% (BNI) to minus 6.8% (CSX). Gross margins (the complement of the Operating Ratio) range from 24.9% (NSC) to minus 1.6% (UNP). Net income as a percent of revenues ranges from 17.4 (NSC again) to negative six percent for UNP. (Kansas City Southern - NYSE: KSU - omitted because the financial assets business really drives the results).

Now look at the shortlines and regionals. Revenue gains run from plus 62.6% for RailAmerica (Nasdaq: RAIL) -- and that includes its truck trailer division, 63% of net -- down to minus 1.1% at Florida East Coast (NYSE: FLA). Gross margins are pretty healthy with everybody seeing double digit results from 26.7% at Wisconsin Central (Nasdaq: WCLX) to 11.9% at Providence & Worcester (AMEX: PWX). The nets are respectable, too. All but RAIL (5.7%) returned double digit net income percentages starting with WCLX at 22.2%.

Yet the multiples make no sense whatever. Zacks says the rails will grow earnings at a rate of 10.7% this year. Yet top-performing GNWR trades at an incredible FOUR times earnings while RAIL trades at a whopping 22 times earnings. RTEX gets a reasonable 9.6 PE while newly debt-free PWX has to settle for 9.4. Among class 1s CSX gets a PE of 17.4 while NS gets just 14.9 based on analysts' estimates of CSX increasing earnings at a rate of 13% in 1999 to Norfolk's 4%. Looked at another way, Zacks says analysts forecast lower earnings for CSX for Q1 and Q2, yet see the year up 13%. The second half - the first two quarters of CR ownership - will have to be really gangbusters!

According to a Bloomburg report, RailAmerica (Nasdaq: RAIL) may have to pony up the entire A$163 million (US$103 million) it bid to buy V/Line Freight for want of local interest. The winning group already has put down A$30 mm as a deposit, something "no organization in its right mind would do if they didn't believe" they could do the deal, according to a spokesman for the consortium. Recall RAIL said when it won the bid in February it wanted to sell 49 percent of the new company to investors and planned to list it on the Australian Stock Exchange in five years. Closing is expected to take place 4/30/99.

Emons has filed a preliminary proxy with the SEC as an initial step to buy out the preferred stock, per Tom Ennis of The Equity Group, NY, (212) 836-9607. Kimberly Smith, Emons Investor Relations, confirms this and adds the proxy is now back from the SEC after review and the Company is in the process of issuing the final document.

The preliminary proxy is available on EDGAR and states in part, "This Solicitation Statement is furnished in connection with the solicitation...of proxies to be voted at a special meeting" of both preferred and common stock at some future date. Specifically, "Each outstanding share of ...Preferred Stock...will be exchanged for 1.1 shares of Common Stock...except that cash shall be paid in lieu of any fractional shares."

There are 1.53-mm shares of preferred stock and 5.95 mm undiluted common shares (dilution adds the preferred conversion equivalent). As a result of this action the new common count becomes 7.63 mm, precisely the diluted share amount shown for the most recent FY ending 6/30/98.

Since 1996 pretax income has risen to $1.5 mm from $759,000. In the same period the preferred dividend has stripped slightly more than $200,000 a year from earnings before calculating earnings per common share. Fortunately, operating income has risen so the percentage hit has been less every year. Now, with the preferred subsumed into the common, a lot of the dilution goes away and more is left to enhance earnings per share. Which can only help the stock price.

Canadian National is joining the reorganization brigade. The new corporate structure is designed to "focus operations and marketing squarely on customer needs and growth while securing the efficiencies of its pending merger with Illinois Central." The new structure will be put in effect May 1 in Canada and July 1 in the United States. According to the CN release, the goals are to…

  • Consolidate the finance and general and administrative functions and marketing business units of CN and IC;

  • Create five new geographic divisions headed by senior officers;

  • Give officers in the field new authority to meet local customer service needs and to control costs;

  • Create divisional sales forces to expand local accounts and to develop new business from medium-sized shippers.

The move toward decentralization is important. Recall the thread running here some weeks about "span of control," or How Much Railroad Can One Person Run? The recent changes at UP, the continued division-based operations at Conrail and NS, and the new Spring (TX) joint dispatching center are all efforts to keep the folks driving the trains close to the folks paying the bills - the customers. Kudos to CN.

Union Pacific will change its corporate HQ city once again, this time to Omaha from Dallas on July 1. In the time I've been following the company, it has been in NYC, Bethlehem Pa, and Dallas. At first it was to be close to Wall Street. Then it was to be close to then-Chairman Drew Lewis eastern Pennsylvania farm. Dallas was part of the SP-in-Texas syndrome. And now the reality of having all the department heads in one place along with the top rail folks is the right move. The actual operation of the railroad has already been decentralized out of Omaha, and that's good. I'd say all the pieces are falling in place.

The forces of reregulation are at it again. Washington columnist Frank Wilner writes in this month's Railway Age that certain "captive shippers have persuaded five senators-Conrad Burns, R-Mont.; Kent Conrad, D-N.D.; Byron Dorgan, D-N.D.; Pat Roberts, R-Kans.; and Jay Rockefeller, D-W.Va.-to co-sponsor the Railroad Competition and Service Improvement Act." The chief railroad worry about this initiative is that it would effectively repeal many of the post-Staggars gains in routing and pricing freedoms.

The proposed legislation would overturn the STB's bottleneck decision by forcing rails to quote rates for intermediate legs of through moves (Rule 11, sorta). It would prohibit minimum volume requirements, often stated as x% of everything the shipper ships between the two contract points, and hardly onerous. It would lower grain rates for shippers with fewer than 4,000 carloads of grain, reversing the practice of every business out there to offer discounts to its largest shippers,

Finally, it would require open access at terminals. First, who decides what defines a terminal? Second, who negotiates the paths for the users? It ought to be the track owner, and guess who will get preference. If the government wants to get into the railroad business let it buy the track and negotiate the paths the way they do in England and Australia. But before the Congress goes down the nationalization path, let the Members be mindful the rest of the world is denationalizing.

Wilner further writes, "Railroad lobbyists intend to repel every reregulation ambition. In defending the word and spirit of the Staggers Act, railroads risk unknown consequences of urging that Congress skip for the second successive year reauthorization of the STB, whose initial three-year authorization expired in 1998. Although Congress voted an additional year of funding for the unauthorized STB, repeat funding of an unauthorized agency is not assured. How the void would be filled is a riddle. But retreat on reregulation could push the Staggers Act onto a slippery downward slope of predictable and quite distasteful results. A perilous legislative chess match is under way."

--Roy Blanchard

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