THE BLANCHARD COMPANY

The Railroad Week in Review:
Week Ending July 3, 1999


RailAmerica (Nasdaq: RAIL) is buying Toledo, Peoria & Western Railroad for $24 million. The seller is a consortium of sorts made up of CSXT, Norfolk Southern, and a handful of "others." This brings RAIL's 1999 bag to four properties: V/Freight in Australia ($US100 mm), RaiLink ($US50mm), CP's 100-mile Vancouver Island line plus TPW. The acquisition of this 369-mile railroad, which should be completed by July 31, will increase the number of route miles operated globally by RailAmerica to nearly 6,000 miles.

Elsewhere, RailAmerica's majority-owned Chilean railroad won new 10-year $33 mm rail transportation contract to move approximately 3.5 mm tons of potassium chloride from the Minsal Salt Flats mine in northern Chile to Coya Sur, a distance of 128 miles. This contract is in addition to the 11-year, $80 million transportation agreement executed with SQM Nitratos in 4Q98.Finally, the company's over-the-road trailer manufcturer garnered a new $4 mm contract for 40 specialty van trailers with final delivery to Saudi Arabia.

Texas Shortline operator North American RailNet, a privately held company, has acquired 364 miles of former Canadian National property in Alberta. The Y-shaped network begins northeast of Jasper at Swan Landing and runs north through Grande Prairie to Hythe and Tangent, Alta. The network handles about 40,000 carloads of coal, forest products, industrial products and grain annually. CN's local switching and yard responsibilities in Dawson Creek, B.C., will be continue to be handled by BC Rail Ltd. This is yet another installment in CN's program to pare down to a solid core system. See also my July Railway Age column on CN's view of shortline partnerships.

Shareholders of Emons Transportation (Nasdaq: EMON) have approved the merger into the Company of its wholly owned subsidiary, ETG Merger Corp. The merger will enable the Company to recapitalize its outstanding Series A Cumulative Convertible Preferred Stock, which had a total liquidation preference of $4,738,882, including accumulated undeclared dividends of $1,767,796 as of May 10, 1999. The merger is expected to be effective by the Company's fiscal year-end on June 30, 1999.

The effect of the merger is that each outstanding share of Convertible Preferred Stock will be exchanged for 1.1 shares of Emons' Common Stock. This provides preferred shareholders with an additional 0.2 share of Common stock (297,000 shares in total) over the current conversion ratio, in lieu of payment of the undeclared dividends. The only class of stock outstanding will be approximately 7.85 million shares of Common Stock. The action is expected to provide Emons with increased flexibility to raise capital on favorable terms in the future.

Wisconsin Central Transportation (Nasdaq: WCLX) has increased its stake in the English Welsh & Scottish Railway to 39% from 33%. To do so it bought some 6.3 mm shares and options of the privately held stock, principally from New Zealand shareholders. The transaction is valued at US$30.4 mm and funded through the Company's existing credit facilities. On a pro forma basis, these additional shares would have added $.05 per share to WC's 1998 earnings, net of interest expense. In a companion transaction, Goldman Sachs increased its shareholding of EWS by purchasing approximately one million shares at the same price per share.

A rail equipment leasing pro writes, "Regarding leased locomotives and the Conrail situation: The rail industry had been waiting almost 10 years for a surplus to develop in high horsepower locomotives. Loco lessors feared it. Operators waited impatiently for lower prices to invest and upgrade their fleets.

"The long expected surplus lasted from fourth quarter 1998 to second quarter 1999 as the Conrail situation opened a wormhole that has sucked up the entire parked high horsepower fleet in one gulp! Shippers may be complaining, but loco lessors are smiling all the way to the bank." Could this mean more low HP power will cascade down to the shortlines who need it? Drop us a note with your views.

The WIR market basket of approximately equal amounts invested in each of 15 railroads would be up 16% YTD. In the up 20%-plus club are CN, CP, KSU, RailAmerica, RailTex, and UP. With the exception of RAIL, which is on its own upward tear, it's all been happening rather quietly since around the end of March. There was no real news triggering the move, probably just the fact that the rail sector's PE got pretty beat down from the market averages, and some investors knew Value when they saw it.

Merger players CSX and NSC are up 18% and off 3% respectively YTD. However, Wall Street is now beginning to cut some FY 99 estimates. When last we looked (WIR 6/26) we noted a sharp drop but not much for the year. Not any more. The NS consensus is now down to $1.62, off 7% for the year, and CSX has been dropped to $2.53, still a gain of 26% over last year's sordid experience. Interestingly, the twelve brokers covering CSX have a range of $2.25 to $2.95 or a spread of 31%. NS has 14 brokers covering and they run the gamut from $1.50 to $1.95, a spread of 30%. Both have seen estimates fall over the past 90 days, NSCX by 10% and CSX by 5%.

Stock prices for NS and CSX have likewise taken a slightly divergent tack of late. The CSX 50-day moving average enjoys a bit steeper upward bias, seeing some appreciation this week after falling from last month's highs. NS hit its post-Split high of $35 intra-day on 6/11 ( now there's a magic number, steam fans) and hasn't been back, closing this week at $30 .

The STB Performance Measures available on the respective websites tell the story as well as anything. For the week ending 6/25 dwell times in the 14 yards reported by CSX averaged 35.1 hours, up 11% from June 4 (the first week of reports) and 3% from last week. NS tracks 17 yards, reporting an average dwell time of 34.8 hours, up 26% from Week One and 8% from last week. The most frustrating part of it is the way the problem areas move around: fix one, see a degradation elsewhere, like moving toothpaste around inside a half-filled tube.

An investor passing by the railroads and plowing 100% into a market basket of ten vendor stocks would have made 5,85% YTD. Yet two vendors, ABC Rail (Nasdaq: ABCR) and Varlen (Nasdaq:) deserve special notice, being up 68% and 84% respectively.

Merger partners MotivePower Industries (NYSE: MPO) and Westinghouse Air Brake (NYSE: WAB) are off 41% and up 6% respectively. Carbuilders Greenbrier (NYSE: GBX) and Trinity (NYSE: TRN) are off 26% and 13% respectively. The third US carbuilder, Johnstown Industries, formerly trading on the Nasdaq as JAII, changed its name June 14 to Transportation Technologies Inc. The new ticker symbol is TTII and it's still on the Nasdaq. And it's about where it began the year, $13.

As for what's down the line, Trinity estimates 70,000 new cars will be delivered from all vendors in 1999, up 40% over 1998. And that's just in North America. TRN also bought a 70% interest in Romania's Astra Vagoane, S.A., one of Europe's leading railcar manufacturers, and is in the process of acquiring the remaining shares. This is TRN's first offshore venture and probably a good one as demand for Euro-freight is growing as the fleet is old and tired.

So what drove ABC Rail up so sharply? Recall that in the past two years the stock price trend has been generally down with the 20-day moving average falling to $14 from $17 and a dip to $8 and back in Sep 98. The price finally got ahead of the MA a month ago and has continued its northward trend closing the week at $19 11/16 vs. $12 3/16 Jan 1.

Recall that in Feb 99 ABCR merged with NACO, a maker of freight car trucks and couplers, in an all-stock transaction. The Street, with a series of upgrades following the announcement generally regarded the move as a plus. ABCR itself was principally engaged in producing specialty trackwork and wheelsets plus other related items, so it's a good fit.

NACO's Barber truck design has long been a standard with car builders, and with 70,000 new freight cars this year there's a market for 140,000 truck frames, 560,000 wheels and an equal number of brake shoes right there. Not to mention replacement parts for the existing fleet. Perhaps that's why the Street estimate for FY 2000 (July) is $1.64, up 160% from this year's $0.63. The long-term anticipated growth rate is 15%. That's 500 basis points ahead of the best of the class 1s. Definitely worth a closer look and we'll do that next week.

--Roy Blanchard


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