The Railroad Week in Review:
Week Ending May 15, 1999

Recall two weeks ago I wrote that it was at times difficult to tell exactly who was rating what railroads. Well, Ron Rittenmeyer, CEO of RailTex (Nasdaq) sent an e-mail listing the analysts covering RTEX and the houses they represent. Pretty glowing reports, too. I might add, with five of the seven he names weighing in with a BUY or better. He also cautions -- and rightly so -- that a 1.7 average rating for Company A from seven senior analysts has got to have more clout than a 1.0 rating based on the reports of just two more junior stock analysts writing on Company B.

Rittenmeyer also has completed the refinancing and expansion of RTEX' senior revolving credit facility to $175 mm to be used mainly for funding the cash portion of future acquisitions. The lead Bank was Chase/Texas. Said Rittenmeyer, "The strong commitment from these banks demonstrates the confidence that they have in our business plan, our senior management team and our strategies for growing RailTex as a leader of short line consolidations and other acquisitions."

The analysts have certainly been watching the fortunes of CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC). Over the past year both stocks have charted in a trough with respect to the S&P 500. While that benchmark rose 15% since May 1998 CSX had by August dipped 30% below its May start and languished there till last month. The recent four-week surge has just gotten CSX back to where it was a year ago. The NSC curve looks much the same. Its big slide was also in August, off 15%, and the climb back to where it began the 12-month period came a few weeks ago. The 200-day moving average for both has been generally down, though the April breakout has pushed both issues above that line. CSX has the steeper curve.

It's hard to tell what's driving the sudden upswing. Zack's says analysts who 30 days ago were looking for $2.63 a CSX share for the year ending 12/31/99 have raised their estimates 2% to $2.68. As of 30 days ago the 1999 consensus for NSC was $1.81 and that's dropped 2% to $1.77 by this writing. Yet all indications both carriers and primed and chomping at the bit for the long awaited June One split date.

Both say all systems are go and the transition mechanisms are in order. Here in the northeast, it's down to the wire with who can win the most hearts and minds in the market place. To be sure, some might argue selling rail service isn't like selling Big Macs. Not so, says a railroad market manager in the Midwest: "Out here the sales guys are blitzing the market area after a telemarketing campaign of 500 potential customers. They came up with over 70 leads for new business and are developing further information about those leads this week." Face time counts.

Norfolk Southern got some good press Monday as James Cramer of checked in with his experience sitting down with a dozen or so CEOs, one of whom was Norfolk's own David Goode. Wrote Cramer, "When you sit down next to chief executive officers of the great American companies, you can feel their restless impatience with doing anything but putting points on the board for their shareholders. Many of these bosses seemed openly gleeful that the market is finally rewarding them for spending all of that money on technology, and keeping prices stable, while margins exploded. I came away recharged and ready for any cyclical selloff to snap up just about every stock of the bosses we interviewed. In particular, I was impressed by International Paper (NYSE:IP - news) and Norfolk Southern (NYSE:NSC - news) , who were very wired to current business trends."

Will Kansas City Southern Industries (NYSE: KSU) ever spin out the railroad, and, if they do, what's it worth? Merrill Lynch and Morgan Stanley think about $8 a share. The 32% stake in DST Systems is worth a sawbuck, they say. As for the Finanacial Asset Management (FAM) side, Merrill thinks $46 and Morgan $53. Which means the present KSU is worth something between $64 and $71, about 27 times 1999 estimates at the high end. It's at $64 now, and once again KSU is hoping for a favorable IRS tax ruling to facilitate a split by year's end.

Continuing with the dueling stock charts thread, the trend lines for Union Pacific (NYSE: UNP) and Burlington Northern Santa Fe (NYSE: BNI) are revealing. Whereas BNI has drifted downward over that time UNP is now back to where it was before the awfuls set in. So why has the underperforming UNP outperformed BNI? Earnings, in a word. UNP's earnings will have climbed 56% from 1997 through 1999 if present estimates hold, never mind the demoralizing loss in the middle year. If present estimates hold for BNI, the 2-year growth rate is 34%.

What's more, Zack's reports a rising trend in UNP estimates for this year and next. BNI's are flat or falling. It appears from here that UNP has come roaring back from the abyss turning in record earnings increases. The market seems to be saying, "If UNP can do this to dig itself out of a hole, imagine what it could do if it starts from a healthy position." (Note: I remain long in UNP.)

No sooner was the ink dry on last week's report than Florida East Coast (NYSE: FLA) announced the creation of a new wholly-owned subsidiary - FEC Telecom, Inc. - to enter the wholesale carrier's carrier telecommunications bandwidth business. Not too surprising a move, given the growing importance of that business to FLA (see WIR 5/8/99). Based in Orlando, FEC Telecom will utilize and seek to expand Florida East Coast's ``Florida Footprint'' telecom assets. The initial focus will be on wholesale service to other telecom carriers in Florida and the intent is to leverage local successes to still broader geographic service areas.

Good news for the wood trade: Short takes: Small cap shortline operator Emons Transportation (Nasdaq: EMON) reported quarterly operating revenues of $6.2 million, a 44% YTY increase, and net income nearly tripled year-over-year. Nine months into the fiscal year operating revenues were up 32% and the net rose 41% year-over year… New England's Providence & Worcester (AMEX: PWX) said in a press release that 1Q99 revenues were off a percent YTY while the net jumped by 91% on the elimination of interest expense thanks to the recent debt pay-down.

The SEC reports are coming out and you can see the 10-Q's for KSU, RTEX, WCLX, NSC, and UNP at Just enter the ticker symbol and hit enter. You might also find it worth while to get the Rule Maker spreadsheet from to compare the lot of them. After all, it's not much good to run the financials on one without benchmarking against another. The Rule Maker spreadsheet allows you to do just that. And you won't have to spend more than 15 minutes on any one company.

Equipment Watch: Every once in a while I get a call from somebody wanting to sell, buy, or lease equipment. This weeks special's are 35 small cube aggregate OT hoppers looking for a good home plus a good home looking for some six-axle medium horsepower units. If you have a lead to suit either need, e-mail me and I'll get you in touch with the right people.

The ASLRRA Eastern Region Meeting is in Montreal this Sunday through Tuesday. With presentations from CN, CSX, and NS among others it ought to be quite worthwhile.

--Roy Blanchard

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