The Railroad Week in Review:
Week Ending May 1, 1999

Earnings Week continues with Norfolk Southern (NYSE: NSC) posting a 3% loss in revenues (mostly coal-related and intermodal), a 3% increase in operating costs, and a 6% decrease in operating income. Net was cut in half after Conrail and discontinued operations, notably NAVL. The good news was that merchandise revenues were up 3%. Automotive was up 16% led by the Ford mixing centers; metals and construction up 3%.

It must be noted the intermodal fall-off was largely a function of lane consolidation whereas the trend overall is generally up. The NSC operating ratio was up half a point to 77 while Conrail's was up 3.2 points to 82.7%. Lastly, in a separate e-mail Tony Hatch notes, "NS feels that they are ahead of their plan on "jump ball biz" vs. CSX. Rate compression overall also was within forecast. And SVP Ops Steve Tobias asserts they will be ready with staffing.

Meanwhile, as analysts were being briefed in NY Jim McClellan, SVP Strategic Planning spoke to the assembled multitudes at the annual Penna Rail Freight Conference in Hershey. Comprised largely of shortlines (Penna has more than any state with 70), conference attendees wanted to know what they might expect June One.

A big motivator for getting this one right, said Jim, will be the readiness of the Forces of Reregulation to pounce on any perceived misstep. Consequently, keeping the information stream on full blast will be essential. On the commercial side, worldwide trends in manufacturing shifts from on-shore to off-shore will continue to fuel container traffic growth, something the shortline audience was not eager to hear.

The good news, said Jim, is that "the new NS is a dream system" and the ability to move cars on time in a reasonable time consistently has never been better. NS is looking for and seeking out partnerships like the Bethlehem transload set up with shortline carrier PB&NE. And shortline initiatives to use the Railway Industry Agreement are welcome and will be listened to. (But be sure to do your homework first -- RHB).

RailTex (Nasdaq: RTEX) reports 1Q98 operating revenues up by 18% to $45.4 mm and operating income up 15% to $7.8 mm primarily as a result of revenue growth and operating improvements at the Company's "Same Railroad" properties. Net income hit $3.4 mm, up 28%. Excluding effects of non-recurring events in both 1999 and 1998, net income was $2.9 million, up or $0.31 per basic and diluted share, in the first quarter of 1999 versus net income of $2.5 million, up 10%.

Sometimes it can be helpful to sanity check your own analysis of a target company by seeing what the Wall Street Analyst have to say. However that's more easily said than done. Small and mid-cap rail stock following is pretty sparse. Numbers like $150 mm minimum market cap for coverage seem to prevail.

Wisconsin Central (market cap $849 mm) is covered by seven analysts. In recent announcements, Merrill Lynch raised the issue to an "intermediate-term buy" from an "accumulate" rating. Previously Morgan Stanley Dean Witter marked WCLX down to "neutral" from "outperform" while Morgan Keegan maintained its "market perform" rating.

So who are these analysts, anyway, and what kind of track record do they have on the stocks they cover? Fortunately, Zacks Brokerage Research Report Service ( can help. In the case of WCLX, three reports are listed -- one by Brown Brothers Harriman analyst Carole Neely and two by Arthur Hatfield of Morgan Keenan.

RailTex (Nasdaq: RTEX) is also followed by seven analysts, though we don't know much about who they are. We do know that Merrill Lynch has weighed in, hiking it to intermediate-term accumulate from neutral, never mind its more meager market cap of $135 mm. RailAmerica (Nasdaq: RAIL), market cap $90 mm is followed by three analysts, and Zacks identifies two of them.

Providence & Worcester (AMEX: PWX), market cap $49 mm, is followed by one whom Zacks identifies by name and who gives it a "buy" based on 15% projected forward three-year earnings appreciation. He works for the same firm that handled last falls stock offering.

Genesee & Wyoming (Nasdaq: GNWR), market cap $100 mm, like RTEX gets no Brokerage Report listing from Zacks yet elsewhere is shown as having a following of two. The bottom line of all this is before you buy a recommendation, look at how deeply a company is followed and by whom. Zacks Rail Transit category ranks 14 firms and on a numerical scoring basis puts GNWR, RAIL, WXLX, and RTEX in positions 1, 4, 5, and 17 respectively. For the long term investor that may be subject to debate.

Providence & Worcester announced that the Rhode Island Supreme Court has confirmed the Company's fee simple absolute title to the approximate 35 acre waterfront property known as the South Quay. This property was created on formerly tide flowed land by the Company to capitalize on the growth of intermodal transportation.

The facility is located 1/2 mile from interstate 195 and 1-1/2 miles from downtown Providence, has direct rail access and is adjacent to a 12 acre site also owned by the Company. Confirming the Company's fee simple absolute title permits the Company to explore all development opportunities for this waterfront site including both rail and non-rail related uses.

In a letter to shareholders Orville Harrold, President, writes," The company intends to explore all development opportunities for the South Quay including both rail and non-rail related uses and believes its costs will be fully recovered from any such future development." Specifically mentioned are double stack trains and value-added services such as wharfage and storage. PWX is now in a position to complete its development plans, says Harrold.

Elsewhere, PWX announced a dividend of four cents a share. With 3.4 mm shares, that's an outlay of $136,000, enough to find the annual track maintenance of 27 miles of class 2 track or buy half a GP-40 in decent shape of three used open top hoppers for aggregate service. One has to ask whether in this competitive environment this kind of dividend expenditure is preferable to additional capital investment (See McClellan, above).

Emons Transportation (Nasdaq: EMON) has adopted a Stockholder Rights Plan" to "preserve long-term values and protect stockholders against unsolicited stock accumulations and other abusive tactics to acquire control of the Company for inadequate value to stockholders." Not that EMON sees any such moves on the horizon. Further details may be seen at www.

Wisconsin Central (Nasdaq: WCLX) and the BLE tell us the agreement reached in February has been ratified by the BLE membership. More than 300 locomotive engineers are covered by he agreement which settles wage and work rule issues to 2001. The agreement does not apply to Algoma Central employees who are covered under separate agreements.

Florida East Coast (NYSE:FLA) more than doubled first quarter 1999 net income to $16.8 mm compared to $8.3 mm for 1Q98 on revenues of $110.5 mm vs. $56.8 mm a year ago, up 94.8% with land sales contribution more than $50 mm to the revenue pie. Operating revenues from rail operations remained substantially level for the first quarter 1999 when compared to the same period 1998. As reported in the fourth quarter 1998 and continuing in the first quarter 1999, the Florida economy has continued to be robust with increases in carload traffic offsetting decreases in intermodal traffic.

When comparing the traffic handled in the first quarter 1999 versus the same period 1998, aggregate traffic increased 13.9%, automotive traffic increased by 5.6%, and all other carload traffic increased 14.9%. Intermodal traffic (container and trailer on flat car) declined 13.7%. This decrease is primarily attributable to a decision by one of the Company's connecting carriers to stop marketing intermodal service to certain terminals as part of its decision to reallocate resources.

--Roy Blanchard

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