The Railroad Week in Review:
The quarterly results keep coming. Wisconsin Central (Nasdaq: WCLX) reported 1Q99 net income of $13.7 mm vs. $20.4 mm for 1Q98 which included the sale of rights under a transportation agreement for $5.4 mm. So absent the special credit YTY rail results were actually down 8.7%. North American operating income was up 12% to $18 mm as the operating ratio shed 130 basis points to 79.7. Operating revenues were up 5% to $88.5 mm for the quarter. Operating expenses however climbed 4%, something the company attributes to an increase in casualty accruals and to weather-related congestion the Chicago area.
Internationally, it was not a pleasant scene. Equity in the net income of affiliates fell 47% to $5.2 mm vs. $9.9 mm a year ago. EWS was off 57% to $3.4 mm million in 1Q99 vs. 1Q98 largely a result of reduction of certain freight rates to market levels, reduction in infrastructure traffic, and weakness in the steel market. Operating expenses were off only 4%, and that had to hurt.
On the other side of the world, equity income from Tranz Rail Holdings was off 20% to $1.6 mm from $2 mm a year ago on a 1% decline in revenues and a 2% decline in operating costs. The contribution from Australian Transport Network Limited (ATN) was $221,000 thousand in first quarter 1999 versus a $30 thousand loss in the year-ago quarter.
Genesee & Wyoming (Nasdaq: GNWR) has confirmed its previously estimated 1Q99 loss of $0.07 per share on operating revenues of $34.2 mm, of 9.5% from 1Q98. Worse yet, operating income for 1Q 99 was less than half what it was a year ago and that produced a net loss of $331,000, compared to net income of $2.3 mm in 1Q98. US freight sales were off 12% as coal revenues alone fell 29% alone.
Offshore, GNWR took a $1.4 m hit on acquisition expenses of which $1.4 went into the unsuccessful bid for V/Line in Australia. And in Canada GNWR lost $769,000 on its former Canadian joint venture vs. a positive $92,000 in 1998. As previously reported, GNWR has closed in escrow on an agreement to increase its ownership in GRO to 95%, and will begin consolidating GRO into its results in the second quarter of 1999. Meanwhile, the stock buy-back continues with 828,000 shares called in to date.
Francois Hebert, CN's assistant vice-president, corporate development, speaking to the Transport Canada-sponsored Short Line Railway Conference, said the emergence of a large and growing Canadian short-line industry since the Canada Transportation Act of 1996 (CTA) was passed has helped revive the Canadian rail system.
The success of the CTA is borne out by the results of CN's network restructuring plan, he said. That plan, initiated in 1996 and now almost complete, identified 9,600 kilometers (6,000 miles) of secondary track as surplus to CN's requirements. Today, more than 80 per cent of that track has been transferred to short-line operators, with the remainder discontinued. Hebert noted that the CTA reduced regulatory barriers to short-line creation, giving a new lease on life to 7,680 kilometers (4,800 miles) of low-density track that had an uncertain future within the CN system.
Hebert said short lines operate lower-density track more effectively than large Class 1 railroads because they have greater operational flexibility, lower operating costs and a local focus on market opportunities. Since 1996, CN has created 27 short lines, in addition to 12 short lines it created before the act was passed. Even before the introduction of the CTA, Hebert said, CN firmly believed viable short lines could become important players in Canadian freight transportation. RTEX, RAIL, and RaiLink (TSE: RLK) have all been participants in the program.
Florida East Coast Industries (NYSE: FLA) is an amazing albeit little-known company. Readers of course know about its rail unit, the 400-mile, $161 mm (sales) class 2 Florida East Coast Railroad (FECR). However FLA is also a $53 mm real estate development company owning or controlling 19,000 acres of prime territory and leasing 6.2 mm square feet of rentable building space. It is a $30 mm trucking firm used mainly to extend the reach of the FECR. And it is a $4 mm fiber optics conduit business that by the end of this year will reach 13 of the largest urban centers in Florida and handling virtually every out-of-state telephone call.
Last Tuesday newly-tapped CEO Bob Anestis invited me to have breakfast with him and Charles Lynch, VP Maintenance for the railroad. Charlie's a talented chap I first met a dozen years ago when we were both with a unit of Day & Zimmernan, a Philadelphia management consulting firm, and he's been keeping me posted on the rail side. So meeting Anestis for the big picture was as timely as it was invaluable.
The synergies in this outfit are exceptional, and surely something many other regional rails can and should model. Use the railroad to move the goods, the real estate to collect/disperse the goods, and the longitudinal easements to transport data - Anestis calls it "electronic freight." Nearly half the railroad's revenues derive from local moves with intermodal and crushed stone being the largest revenue generators. Automobiles rank a distant third. Carload business for 1998 was up 9% over 1997 while intermodal was off 5% thanks to Norfolk Southern's demarketing certain short-haul lanes (see WIR 5/1 re NS intermodal).
Of course, railroads and real estate are capital intensive businesses, so Anestis is looking at other ways to boost returns on capital even as FLA seeks to keep its cost of capital within reason. Fiber Optics is one answer, and by December the franchise will make a big loop extending the length of the FEC from Jax to Miami, thence over to Naples, up to Tampa, and back through Orlando to Daytona Beach. That loop comprises 73% of Florida's total population, which is more than the total population of all but six other states.
And the numbers are strong. There is no debt, and over the past two years revenues are up 19%, net income up 43%, and shareholder equity up 13%. Stock performance has unfortunately lagged the broader indices, running at about half their pace for both cumulative and annualized returns. However, the the last three months FLA perforemance has been triple that of the DJIA. Recall it was three months ago Anestis came on board. Coincidence? Maybe, however this one bears watching and with Anestis in the driver's seat we could be along for a very nice ride.
Further down the Florida coast in Boca Raton a three-hour session with a bunch of the boys at RailAmerica (Nasdaq: RAIL) was most enlightening (as these sessions usually are). RAIL stock has consistently led the rail industry in total returns and shareholder appreciation for the last three years. The "Briefing Books" area at www.wsj.com shows cumulative returns over 3 years at 420% vs. the DJI's 224% and average annual compound growth at 47%, 47%, and 39% for one, two, and five years respectively. The industry returned 1%, 4%, and 13% respectively in those periods. Watch for RAIL to grow its rail business faster than the truck side going forward. My only concern is a sizable debt load, however the boys in Boca maintain it's manageable. With returns like these, one would hope so.
Closing note: Landon Rowland, CEO of Kansas City Southern (NYSE: KSU) has been seen beating the drum for library funding, something very important to certain other members of the Blanchard household who do likewise for the library at the U of P across the Schuylkill from where I sit. Rowland, a board member of KC's Linda Hall library, has remarked on the need for academic and research libraries to not "go by the book." Instead, he suggests, "we need to be subversive in order to attain funding for the extraordinary missions and needs of our libraries."
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