The Railroad Week in Review:
How much will the Conrail transaction cost? The week's mail contains too many harrowing stories of service failures and cars not delivered, and too few offsetting stories of the trend being reversed. One of my analyst friends wrote in response to last week's Review: "I find it interesting that shortline people talk about problems in the CR split involving Ford, etc., especially since this often appears to be second hand gossip."
Not necessarily. Read what a shortline operator in Ohio writes: "Our traffic between Canada and Ohio via Detroit has almost come to a stop. Cars are taking many days to get the 300 or so miles to us from Detroit. Our customer supplies parts to Ford in two locations in Southern Ontario. One of the two plants has already converted to trucks costing me about 7% of my traffic. Another 21% is at risk if these problems are not soon fixed and this loss of almost a third of our revenue will be a difficult pill to swallow.
"I agree that short lines need to be participants in solving this problem and not simply whining from the sidelines. We have offered to go straight to the class 1 serving yard for our cars and even do it an no charge if that will help. (We were turned away.) My customers view me as part of the railroad industry and thus part of the problem. We must be part of the solution!"
Another regional carrier, this one in Pennsylvania, is currently running at about 55% of its normal inbound volume, and the outbound side is affected accordingly. The customers are not exactly mom and pop outfits, either. The road's customer list includes Heinz, Westvaco, Ford (again), Corning Glass, and International Paper. Scratch any shortline and you'll find a healthy list of major NYSE corporations and their vendors, so as go the shortlines so go the class 1s.
Yard congestion and train speed continue to be concerns. For the week ending 6/18, Norfolk Southern yard inventories were up 3% to 161,000 cars system-wide. Elkhart saw the largest increase (46%) and Decatur (IL) the largest decrease (5%). Average train speeds decreased six percent and merchandise train speeds slowed by more than 10%. (Details at www.nscorp.com). CSX doesn't give a yard count, though dwell times and system car counts were both up slightly. Average train speeds improved to 18.5 mph from 18.1 mph (see www.csx.com).
Wall Street consensus estimates for the quarter have knocked NS down anywhere from four to eight cents a share and CSX from 20 cents to a dime. Put in terms of earnings, a penny per share reflects $4 mm in net income to NS and $2 mm to CSX. Picking the middle road, six cents lower eps for NS means $24 mm less net income. That translates to $138 mm less revenue on 1998's net margin of 17.4%. With revenues running at about $1.1 billion a quarter, it's a slippage of almost 13%.
Taking the middle road for CSX, easing 15 cents out of the eps means net income slips $30 mm. For 1998 the CSX net margin was 6.0%, so revenues could be off by some $500 mm. But recall CSX is more than the railroad. The CSXT rail side plus the CSXI intermodal side combined generate 58% of the total corporate income in 1Q99, so we could be looking at $290 mm less rail and intermodal revenue, or about 20% of the quarterly $1.4 billion in combined quarterly sales generated by "Tee" and "Eye."
Estimates for the full year 1999 have in the past month been marked down only a penny or two for each railraod. But the part worth noting concerns NEXT year's estimates (FY 2000) with NS up 31% and CSX an eye-popping 35%, the kind of return you'd expect from a Dell (Nasdaq: DELL) or Cisco (Nasdaq: CSCO). How does this compare with the pro formas in Volume 1 of the original STB application?
Recall the Filing revenue estimates represent "gross revenue gains from additional traffic, net of gross revenue loss from enhanced competition," so the effects of rate compression have been somewhat addressed. Year One was nominally 1999, though I think we're all pretty much agreed Year One is now 2000. Street estimates for next year have CSX earning $3.56 a share, or $774 mm on 217.39 mm shares. The Filing has Year One net earnings at $753 mm. That's encouraging.
As for NS, street estimates FY 2000 will see $2.25 a share or $855 mm on 380 mm shares. The NS Filing pro formas estimated $776 mm net for Year One. Again, not too shabby. Thus it appears that despite the present wobbles the investor side has confidence that these two railroads have the financial strength and discipline to do what they said they would with their respective parts of Conrail. And that's the best news of all.
NS continues to e-mail its "Implementation Updates." Friday's report notes improved customer access to shipment information and elimination of some significant information systems problems. Blocking systems are being refined to route cars more efficiently from origin to destination with particular emphasis on the Shares Areas. Carriers delivering to NS from off-line origins are preblocking and using alternative gateways so NS can internally reroute through less-congested parts of the railroad.
Additionally, NS says more resources are being added to the its system. Norfolk is leasing 92 more locomotive units, has beefed up the NSC in Pittsburgh to manually correct any car routing problems that arise, and has hired 140 more train and engine service employees. And, as noted here previously, NS is using alternate routes for overhead movements and yards of other railroads to relieve congestion. Shortlines playing a role include the Ohio Central, overhead movements since Closing Date. Currently, the Philadelphia Bethlehem & New England, the Lycoming Valley, the Union Railroad, the Wheeling & Lake Erie, and the Elgin Joliet & Eastern.
The STB has granted a request for relief from the Denver Rock Island Railroad (DRI) to provide interim rail service on a 9.6-mile segment of line owned by the Kansas Southwestern Railway (KSW). No rail service is currently being provided on the subject line, which has already been approved for abandonment. Under the rules, shippers or connecting railroads receiving poor service from an "incumbent" carrier can seek temporary service from an alternative rail carrier. If the incumbent railroad can't - or won't - do the work then an application to the STB may be in order.
DRI is attempting to buy the line from KSW and expects to close the transaction during August 1999. It stated that it needs temporary service authority so that it can respond to an urgent request for service by Stafford County Flour Mills Company. DRI indicated that it has discussed its proposal with the shipper and with the incumbent carrier, KSW, and KSW submitted a letter indicating that it and DRI had entered into a written agreement setting forth the terms and conditions of DRI's service proposal. For the record, KSW is owned by OmniTrax and operates about 300 miles of fallen flag Missouri Pacific, (now part of the UP). DRI is a 4-mile switching line in Denver, CO.
There's a helpful sidebar on page 74 of the June Progressive Railroading: "Financial Help is on the Web, in Your State." The theme is funding infrastructure improvement, much of it to do with bringing shortlines up to snuff with respect to 286,000 lb. cars. For starters, see the Shortline Assn (www.aslrra.org), US DOT (www.dot.gov), and the State Highway Officials site (www.aashto.org). Search on "shortlines" and you may be pleasantly surprised.
Next week: the Vendors. Remember them?
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