The Railroad Week in Review:
Week Ending October 2, 1999

RailTex (Nasdaq: RTEX) made both the Nasdaq Price Gainers and Most Active lists on Monday, jumping more than $3 in one day. But this isn't the first time RTEX has moved a lot in a short time. In the past 12 months RTEX has been up to $17.25 and down to $7.50, the highs and lows occurring in Oct 98 and Feb 99 respectively. Beginning in March the stock climbed steadily from $11 to about $15 by the end of Aug. The 200-day moving average slowed its decline in May and started up in July.

Then the week of Sep 13 RTEX took consecutive hits falling below $13 by Sep 24. And that brings us to Monday's jump and successive increases during the week, finishing the quarter up 46% YTD, by far the best performer in my 14-stock market basket. On the fundamentals, RTEX in the $16 range is 10.5 times the 2000 estimate, $1.53, 12.4% ahead of the 1999 estimate, for a PEG ratio of 0.87, well in the Buy range of 0.50 to 1.00. The 5-year rail industry multiple stands at 14, so a forward price somewhere in the neighborhood of a double sawbuck on RTEX does not seem unreasonable.

Back in the rest of the world, $1,000 invested in each of 14 rail stocks 1/1/99 was worth $13,356 at quarter's end. RTEX as noted was the star performer, followed by Canadian Pacific (NYSE: CP) up 20.8% and RailAmerica (Nasdaq: RAIL), up 16.2%. The only other plusses were Union Pacific (NYSE: UNP) 6.7% and CSX (NYSE: CSX) up 2.1. The rest were all losing stories, with Norfolk Southern (NYSE: NSC) the loosingest of all, off 22.7% YTD.

There was some very insightful feedback to Jim Cramer's remarks about transport stocks not mattering any more (WIR 9/25). A senior manager with a class 1 railroad writes, "The comment about transport not being relevant from a Wall Street perspective may be true. If so, how does the economy function long term? So I guess in the Internet economy I will have to be satisfied with looking at whatever I want to buy because it cannot be delivered to me (there being no trains or trucks to accomplish that).

"And I guess I had better get my kicks about the next vacation in Fiji from the pictures on the net, because the airlines won't be able to take me there. It is amazing that no one sees any connection between a transportation system that we all take for granted and the need to earn an adequate profit. A sad commentary on the how well all of us in transportation do at public relations."

Another regular contributor (a dispatching supervisor out west) wrote to say the BNSF Ice Cold Express conveys 64 trailer loads from San Bernardino to Chicago in only 57 hours ramp to ramp. To which a former long-haul truck driver and regular contributor responds, "64 driver teams (128 drivers) can load the 64 trailers at the farm or wherever, average 60 mph while actually driving, waste 8 hours eating, fueling, waiting at ports of entry, etc. and make the 2047 miles from Los Angeles to Chicago in just over 42 hours. At the grocery store, not the railhead. If they hustle like most reefer teams do they will do it in less than 35 hours.

"I know, that is an awful lot of drivers, with some support people thrown in too. It takes a lot more than engineers and conductors to move that train from San Berdoo to Chicago, too. Rails will be able to do what rails do best and trucks what trucks do best only when railroads start solving logistic problems for their customers instead of just moving cars from here to there." Sounds familiar, doesn't it?

Re New York's Southern Tier (WIR 9/25), correspondent and ex-Conrailer Larry DeYoung, e-mails "the mileage to Cleveland is substantially longer now since the E-L Cleveland line has been abandoned and removed. The closest way from Hornell to Cleveland is down to Warren, then on down what CR called the Detour Secondary (Lordstown) to Alliance, then back up the C&P to Cleveland. That has to add another 50 miles or so to the trip. Never mind the plant has been sitting there for over ten years since the rehab w/o a dollar having been spent on it."

The NIT League last week released results of a survey concerning effects of the Conrail transaction on rail service. The most prevalent service problem has been delayed shipments. How shippers dealt was pretty consistent, with 86% saying they bit the bullet and paid extra for truck shipment. Two out of five got stuck with higher storage charges, and nearly half paid extra charges for rail cars and/or slowed down plant operations. One in seven shut down entirely. From this it appears both railroads should "expect large claims for the extra costs incurred," said the report.

Concerning service since Aug 1, not one said Norfolk's service was better that it was pre-Split Date (June 1), 16% said it was the same, but a whopping 83% said it had gotten worse. Over at CSXT, 3% said better, 28% the same, and a not inconsequential 64% said worse. Since Sep 1, the NSC camp included 12% seeing improvement, 60% saying nothing has changed, and 24% said they were worse off. CSXT's customers seemed more satisfied, with 28% seeing improvement, 55% reporting no change, and only 10% sensing further declines. It will be instructive to see what happens when non-assignable contracts become assignable in the next two to five months.

Dave Parkinson, President of the California Northern and other shortlines, writes a regular column in his company's newsletter. He latest opus, "Where Are We Going," is especially apt. David says, "One of the frustrations of the railroad business is our lack of real, dynamic growth. While the GNP grows at 3% a year rail traffic grows at 1 or 2% a year. That means we are losing transportation market share.

"While the railroads' share of the business has stabilized at about 40% of the intercity traffic volume measure in ton-miles, our share of intercity freight revenue has dripped to 11%. That means we are hauling more freight for a smaller piece of the revenue pie. To reverse the trend, class 1 railroads need to refocus their marketing efforts on the real competition -- the trucker -- and resist the temptation to take away business from [other railroads] by lowering rates still further. And the class 1s need to make better use of their shortline connections to extend their reach."

David is spot on. Rail sales reps still target other rails because it's easier. You can see who has a car at their siding and you can easily figure out what's in it and where it's going or coming from. Not so easy to do with a truck. Also, the rail sales rep walks in the door with "CHANGE" written across his forehead and the typical truck-oriented freight buyer doesn't want to know from change.

In my opinion many Big RR reps and LOB-types don't do shortlines well because having a shortline in the route means less class 1 revenue to show and thus fewer points on one's score. Total cost of acquiring that revenue - from fuel to ties - still seems in many instances to count less than top line bucks. (If I'm wrong, I wish a class 1 market manager would write and tell me positively the reps and LOB managers are graded on profitability, not revenue.)

Westinghouse Air Brake (NYSE: WAB) and MotivePower Industries (NYSE: MPO) have signed a revised merger agreement. The deal, which is expected to be completed by 12/31/99, will give MPO shareholders 0.66 WAB shares per share of MPO held, and WAB will emerge with 59% of the new company, to be called simply Westinghouse Air Brake. The same WAB players remain in charge with Joe Crawford, MPO Chief Operating Officer, tapped as EVP for the rail products group. MPO top gun Jack Pope will leave the company. The combined company's Board of Directors will consist of WAB's eight directors, plus four directors from MotivePower Industries.

According to a press release, the combined company "is expected to achieve a substantial combination of revenue growth opportunities, efficiency improvements and cost savings through synergies. These synergies are expected to result in operating income improvements of $10 mm pre-tax in 2000 and to be at a run rate of $20 mm pre-tax by year-end 2000. By year-end 2001, savings are expected to reach an annual run rate of $30 mm pre-tax. The merger is expected to be accretive to WAB's earnings per diluted share in 2000, excluding transaction costs and restructuring reserves yet to be determined."

Here's an interesting twist on the 286 question. Some shortlines are out adding to their fleets by purchasing second hand equipment with an eye to upgrading what they get as 263s to 286s. However, there appears to be no universal answer on what it takes to do make a 263 into a 286. Any ideas? I'll publish responses here next week, with or without attribution. Your choice, but please write regardless.

--Roy Blanchard

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