The Railroad Week in Review:
Week Ending November 20, 1999

The 3Q99 earnings conference call held by RailAmerica (Nasdaq: RAIL) on Monday was both edifying and encouraging. Edifying because it drives home the point that expanding the franchise is a jolly good way to grow the revenue base. And since the class 1s are pretty much done with line sales, purchasing extant shortlines is the obvious next choice.

North American freight revenues nearly doubled to $11.6 mm for the quarter, up 172% YTY, thanks mainly to the Canadian acquisitions plus a month's worth of Toledo Peoria & Western. Regarding "same store" revenues, Wayne August, Director of Investor Relations at RAIL, writes, "According to our 10Q, nine month YTD same railroad carloads were up 3%, while the third quarter number was down 8%." The quarter was down primarily due to car supply limitations and a delay in sugar beet shipments in Michigan plus weather-related slow-downs in Minnesota.

Offshore, RAIL's operating revenues grew an astounding 457% to $26.9 mm over 3Q98, or five and a half times on just three times the number of carloads. International revenues and carloadings include the operations of its Chilean subsidiary, Ferronor, and its newly-acquired Freight Victoria railroad in Australia. Here again RAIL notes that the growth in YTY revenues and carloadings was primarily attributable to the inclusion of Freight Victoria.

The encouraging part is that in North America the flat "same store" results are clearly temporary, and the business base is fundamentally good. Elsewhere, the opportunity is there to grow results significantly without spending another ton of money. The other thing that is going on is an increase in average carloads per mile of railroad operated. That, together with the announced sale of the Kalyn/Siebert trailer maker, show RAIL is putting its core railroad business into much sharper focus.

Debt continues to be a concern, and at the end of 3Q99 it had doubled to $158 mm YTY even as the number of outstanding shares increased by half to 15.5 mm. Interest coverage continues to be thin at just under two times. However, given the strides in making strong acquisitions, shedding non-core businesses, and increasing "same store" yields the focus now shifts from how much debt RAIL has to what it does with that debt.

Elsewhere the STB published its notice of the RAIL-RTEX transaction in the 11/16 Federal Register. The Board feels the proposed procedural schedule is "adequate for full and fair development of the record in this proceeding," and is asking that comments be filed by 12/6/99 with applicants' due on 12/15. The STB decision is slated for 1/14/00. The class 1 roads have begun to weigh in with their comments, and same will be duly noted here.

We've written recently about rail stock prices relative to their future earnings. For further enlightenment on that topic, one only need to see this week's Barron's. Bill Miller, portfolio manager of the Legg Mason Value Trust, observes, "Undervaluation isn't determined by a stock's price in relation to existing or trailing earnings, book value or cash flow, although these may be evidence of a price that is below intrinsic value.

"Undervaluation is determined by the relation between a stock price and the present value of the free cash the underlying business will generate over one's forecast time horizon. The theory of value indicates that all of an asset's value derives from the future. Avoiding the analysis of possible futures, their probabilities and expected payoffs, may constitute the greatest error of all." He knows whereof he speaks. Miller's fund is up 21.5% this year, and it has outpaced most other large-capitalization value mutual funds over the past three, five and 10 years, says Baron's.

Continuing an earlier thread [WIR 11/13/99] it appears to be getting tougher for shippers to get timely responses to interline rate requests. A friend writes, "Interline is effectively dead for anybody but a maxi-clout megashipper and then it takes weeks (not days) to process an interline rate request." Message is -- find a way to get it there single line on yours or via a regional/shortline partnership arrangement. Least affected in the East is probably CSX who pre Conrail had a ninety percent concentration of its traffic east of the line between Kansas City and Houston. This will have fallen but mainly because of Conrail intermodal they picked up and this can be rubber tired to o/d if necessary.

I put this question to a list of 75 shortlines and got both good news and bad news. The Marketing Veep of a Plains States shortline holding company wrote, "problems center primarily on service issues rather than responses from the marketing groups." Yet in the Pacific Northwest his counterpart on another shortline, which connects with the very same class 1s, writes, "If car needs to go off line we have a delay right now and that delay can take weeks to determine a rate."

There were mixed reviews in the east. One chap reports it took three months to get a quote. In another, even TOFC was so erratic as to force the move to all-rubber. On the other hand, an Ohio shortline reports, "Rate requests have never been really fast and always seem to take several days after some prodding. And here in Philadelphia I have my own bit of good news. The client wanted a rail rate on 400 truckloads of light-loading paper from a CSX origin to his DC located in the Shared Area. I went to the CSX website and found an invitation to call 1-800-CALL-CSX for rates.

The number was punched in and the phone answered on the first ring. A pleasant and well-informed voice at the other end took my request and asked a number of very knowledgeable questions to help her sharpen her response. Within in a couple of hours I had not only my number but also some options concerning volume discounts. Recall that in WIR 10/30 I wrote, "The CSXT e-commerce game plan is to get the rate-making logic onto laptops so the sales rep can give a customer a rate right on the spot." My experience indicates progress in that regard. The next step is for customers to be able to log on to and get their own rates.

Amtrak has signed a 15-year agreement to add up to 350 refrigerated rail cars to ExpressTrak's service moving perishable commodities in rail cars attached to regularly scheduled Amtrak passenger trains with the first prototypes to go on rail by April, 2000. Using existing capacity to improve revenues without appreciably adding to the OR is what this is all about. It is projected that that the investment will pay for itself in a short time due to the high demand for expedited service. ExpressTrak specializes in moving temperature-sensitive commodities such as fresh fruits and vegetables from centers such as Jacksonville, Florida; Los Angeles and Oakland, California, to major cities across the country, primarily east of Chicago.

Because perishables will move at passenger train speeds -- up to 90 miles per hour -- on tight, consistent schedules, the service will ensure fresh delivery for buyers in distant markets. Local truck cartage is used to bring commodities to intermodal and trans-loading centers where they are loaded into the refrigerated rail cars. At the destination city, the cargo is transferred to trucks for local delivery. Moreover, there may be opportunities for shortlines to interchange this traffic directly with Amtrak, avoiding the dray entirely. This goes back to the timing of trains at interchange points, something we've been harping on in the context of car utilization with the class 1 roads.

The surprise of the week was the resignation of Tom Finkbiner from NS to take the helm of Florida-based Quality Distribution and its Quality Carriers subsidiary, a tank and bulk carrier. Finkbiner had been VP-intermodal, and one of the more outspoken proponents of our industry. Regarding the resignation, NS Chairman David Goode said, "The progressive changes that Tom encouraged at Norfolk Southern will be felt for many years. Almost single-handedly, he raised our awareness as to how we can take advantage of the best features of trucks and railroads to improve customer service." Boy, ain't that the truth. Good luck, Tom.

--Roy Blanchard

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