The Blanchard Company--Week in Review 8/7/99

The Railroad Week in Review:
August 7, 1999

New York shortline entrepreneur Bob Dingman has added yet another Canadian National property to his portfolio. This week he and CN announced reaching an agreement in principle for the transfer of 41 miles of industrial feeder track on Ontario's Niagara Peninsula. These lines, which transport mostly paper products, industrial chemicals and metals, handle an average of 1,400 carloads of freight annually. What's at work here is a process whereby a shortline operator can grow a system by paying attention to the basics and supporting his connecting class 1's objectives all at once. Congratulations, Bob.

There has been significant discussion of late relating to product - specifically chemicals -- safety on shortlines relative to safety on the class 1s. We've talked with some of the leading chemical shippers, the Chemical Manufacturers Assn., the class 1s, and the American Short Line and Regional Railroad Assn. We're well aware of the FRA's concerns in this area. So it is most heartening to see examples of shortlines aggressively addressing the issue.

The New York & Atlantic, a unit of the privately-held Anacostia & Pacific shortline group, recently held an Emergency Preparedness Drill in cooperation with the NYC Police and Fire departments. The exercise was to simulate what would happen if an automobile rammed a propane car and caused a 50 gallon-per-minute leak. The purpose of the drill was to get the City's emergency personnel familiar with the railroad and vice versa. It must have been a success because the ranking fire official at the scene gave the drill a score of 7.5 points out of a maximum score of ten. All players found ways to improve the score, and no doubt they will take another run at it. Other shortliners please take note.

The Analyst Corner at multexinvestor.com is a wealth of industry information and sometimes you get some ideas that relate to railroad prospects. Case in point: Friday's feature is Legg Mason Equity Research's David D. Weaver on federal construction spending. He writes, "We think there are investment opportunities rising from the six-year, $218 billion federal transportation spending bill.

"We think several construction-related industries are positioned to benefit from the increase. In particular, the basic materials that go into roads and bridges: aggregate (crushed stone, sand and gravel), concrete, asphalt, and several related products." He has something there. For the four weeks ending June 5 (the latest available) AAR category "nonmetallic minerals and products" was second only to agriculture among all merchandise categories. As Legg Mason's Weaver notes, it may be helpful to follow the fortunes of such leaders as Vulcan Materials Co. (VMC), Martin Marietta Materials Inc. (MLM), and Lafarge Corp. (LAF).

The AAR says the number of cars in the US rail fleet grew for the fifth year in a row during 1998 to a record 1.3 million cars, up 4% from the 1997 total. Unfortunately carbuilders Trinity (NYSE: TRN), Greenbrier (NYSE: GBX) and the former Johnstown, now Transportation Technologies (Nasdaq: TTII) stocks haven't really reflected the growth. Until this is sorted out a better play might be the leasing companies. GATX (NYSE: GMT) carries a Zacks rating of 1.00. The PE for the year 2000 earnings is 10.8 vs. a forward growth rate of 13%. That's a PEG of 0.83, class. Might be worth a look.

Locomotive units on the road have grown as well, passing the 20,000-unit mark, up 3%, and horsepower up 5%. That's not too surprising since the class 1s are the major buyers and the units keep getting bigger and bigger. Look for MotivePower Industries (NYSE: MPO) to turn the corner shortly. It is the leading supplier of rebuilt locomotives and maintenance parts and is well-positioned to serve the shortline market, now with more than 550 companies nationwide vs. fewer than ten class 1s. MPO is now trading at half its 52-week high and well below both the 50-and 200-day moving averages. The '00 estimate of 20% earnings growth against a forward PE of 10 gives a PEG of 0.50. Another candidate for a closer look?

Shortline holding company Genesee & Wyoming (Nasdaq: GNWR) posted 2Q99 results this week, coming in at 62 cents a share vs. a consensus of 35 cents and 34 cents for 2Q98. The main drivers appear to have been a 15% revenue increase coupled with a 14% expense increase and an 18% decrease in outstanding shares. The Operating Ratio (OR) improved 80 basis points to 86.3 and net margins were up 150 basis points to 6.4%. By way of comparison, RailTex (Nasdaq: RTEX) for 2Q98 reported an OR of 82.0 and a net margin of 7.8%

LTD continues to grow at GNWR, increasing to $90 mm from $65 mm in 2Q98. This could be a bit of a drag as principal payments and capital leases in the period came to $29.7 mm vs. the new debt of $30 mm. Operating cash flow was $10.2 mm which covers the $1.9 mm interest expense quite handily. Elsewhere, GNWR won a 30-year concession from the Mexican government to operate the 960-mile Chiapas-Mayab line in southern Mexico. With about $30 million in estimated annual revenues, it is in the size range of regions in the GNWR portfolio of U.S. holdings. Together, the US properties generated about 54% of the quarter's revenues against 44% of 2Q98's revenues.

Wisconsin Central (Nasdaq: WCLX) did not fare quite so well in the quarterly sweeps as the quarter's per share earnings were even with 2Q98's at 37 cents a diluted share. Said a press release, "Improved results from the Company's North American operations were offset by declines in the Company's international operations. Certain one-time credits and charges significantly affected the net income from the Company's international affiliates for the second quarter 1999." On to the details.

North American revenues hit $90.8 mm, a new quarterly record, up 7%. Operating expenses rose even faster - 8% -- and as a result the net was up 5%. Overseas, the EWS contribution dropped 68% to $1.8 mm on lower revenues and higher expenses. Contribution from NZ and Australia tripled to $4.2 mm, enough to wipe out the EWS loss with some change left over. All in all, though, flat earnings YTY does not a happy investor make. The stock-watchers a Zack's think earnings will grow about 12% in '00 to $1.62, making Friday's close (17 5/16) about 11 times earnings. That's a PEG pushing one, and there may be better buys around.

And now for dessert. Kansas City Southern (NYSE: KSU) kept Wall Streeters on the edge of their seats at 270 Park last Tuesday as Landon Rowland first delivered the results and then delved into the division of the company. For the quarter, earnings rose 45% to 66 cents per diluted share from 46 cents per diluted share in 1998. This is exclusive of a $4.4 mm gain from a Janus sale and $1.8 mm from a KCS railroad line sale.

Combined US and Mexico rail operations saw a 37% decline in earnings per share. Revenues dropped $4mm and expenses grew $6 mm, winding up with a 2Q99 Operating Ratio of 84.1 vs. 78.1 a year ago. Less coal and more congestion were named as two of the culprits.

As for the split, a press release said simply the Board had considered the Janus proposal re "Stillwell" (WIR 7/31) it "decided to proceed promptly with the transaction already favorably ruled on by the Internal Revenue Service. This separation is expected to be completed during the fourth quarter 1999." Evidently the BOD was not convinced there were "sufficient reasons for changing direction at this late date." Let's see where the prices go from here.

--Roy Blanchard

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