The Railroad Week in Review:
Week ending February 26, 2000

FY 1999 revenues increased to $175.6 mm, up 19.1% and ops income was up 14.3% to $22.4 mm YTY. Here again the effect of the insurance settlement skews net to a paltry 9.6% increase, $12.5 mm. Without the insurance gain the 1998 net would have been $7.4 mm for a YTY change of 68.9%. Pre-insurance eps YTY nearly doubled helped in part by a 13.1% decrease in the number of diluted shares outstanding.

GNWR thoughtfully provided EBITDA for the quarter and year. For the latter it amounts to $7.96 a share vs. $5.64 a year ago. At the closing prices of 12/31/99 and 12/31/99 that works out to 2.3 and 1.6 times EBITDA respectively. When you consider that RTEX and RAIL are selling for around seven times (see p 41 of the merger prospectus) GNWR looks like a steal.

In the Jan carloads department, the raw figures include the recent additions in Canada and Mexico, and show a near doubling to 33,199 loads. On a same store basis the increase is still 32.5% YTY due largely to coal, minerals, and paper.

Emons Transportation Group checked in with some strong numbers for the quarter ending 12/31/99, their 2Q00 on a June 30 fiscal. Using the Rule Maker spreadsheet for analysis and comparison, revenues were up 22% to $6.4 mm while operating expenses (one has to derive this from the percentage operating margins provided) rose just 18%. Moreover, revenues excluding acquired operations rose 9.5% on 8% more carloads, meaning average revenue per carload increased. Intermodal loadings were up 11%.

The operating ratio improved 290 basis points to 83.2, respectable in any crowd, and LTD dropped 8.3%. Diluted shares increased 25% to 8 million as a result of folding the preferred shares into common in 1999. Equity increased 15% thereby improving the debt/equity ratio markedly. Unfortunately, market cap declined 4% YTY mostly as a result of the stock price dipping 23% YTY.

Interest rose 25% to $285,000 but that's not all bad. Operating income rose 47% and as a result now covers interest nearly four times vs. a tad over three times last year. In sum, revenues increasing faster than expenses, improved revenue per carload, a lowered LTD load, increased equity, and improved interest coverage are all good news. My personal take is the share price has been beaten down along with other small caps in general and the railroads in particular. However the company trend is certainly in the right direction and share prices are sure to follow.

Multiple-railroad freight rates have come to the Internet, and shortlines are included. For example, apple growers in south central Pennsylvania can go to www.uprrr.com for the cost of moving a carload of apple juice to Stockton, CA. The origin road is the Gettysburg Railway and the class 1 connection to the UP is NS.

The UP site provides the STCC if it's not at hand already and takes the user through a series of steps to arrive at the rate, routing, equipment requirements (Equipped Box Cars - 59' to 79' interior length, cushioned), and rate authority. Still other CA destinations come up just by clicking on the authority line. And if that isn't enough the UP was thoughtful enough to advise that this rate applies to more than a thousand other commodities, listing them all by seven-digit STCC.

Now that all the class 1 year-end results are in, it's time to compare the numbers and ratios we came up with using our Rule Maker spread sheets. The six "pure" class 1s are shown; FES, KCS, and CP are omitted because the consolidated balance sheets don't strip out the rail side. Not surprisingly, UP has the largest ($11.2 bn) revenue stream. The highest net ($1.1 bn) goes to BNSF. Canadian National has the lowest OR (72.0) and BNSF the highest net margin (12.5%). NS has the highest debt/total cap ratio (56.0%) and CN the lowest (39.8%).

The shortline holding companies will be done once the annual results are in. RailAmerica plans to release fourth quarter results this week (no date yet). The fourth quarter results will be for RailAmerica only since the merger was not completed until February. RailTex will not release fourth quarter results. Starting in the first quarter, RailAmerica's earnings will include RailTex operations from 2/4/00. PWX is expected early March. WCLX will be posted when they have a 12/31/99 balance sheet available.

Misery Loves Company-2. It’s not only the rail stocks that are getting hammered these days as money forsakes the tried and true for the glitzy new kid on the block, high-tech. The whole DJIA is off 14% YTD. Just look at the carnage: Caterpillar off 16%, Kodak off 11%, DuPont off 22%, Alcan 19%, Georgia Pacific 32%, and so on. The most sorry aspect of all is that this downward cycle is beginning to feed on itself. Even with these old-line industrials all poised for double digit increases this year and next.

There has been some very perceptive response to the thread launched two weeks ago about lessons private industry could learn from the military about planning and execution (WIR 2/12/2000). An institutional investor writes, “The economic concepts of returns on vs. costs of capital do not normally enter into military thinking. Nor do the monetary incentives that motivate employees to achieve small objectives. Employee empowerment also is foreign to military thinking. Most importantly, the idea that there is a customer that must be satisfied is not part of military thinking.

“Furthermore, technology has caused diminishing economies of scale. Truckers are taking full advantage of this phenomenon. Computer programs of all sorts, purchasing power through associations, outsourcing of various costs, all make small truckers competitive. The rails will gain market share when they disaggregate by function and fragment the customer service functions to small focused regionals. The strength of trucks is that the highways are owned by one entity that is focused on their state of repair, that the trucks are owned and maintained by competing leasing companies that are focused on their economic employment and uptime.

“This should favor regional rails, but be careful. One of RailTex's problems was lack of control over too many pieces that brought too many financial surprises for the small corporate staff to handle. I am not optimistic, since the mindset of the rail executives and of the government are now mired in the obsolete bigger-must-be-better model, combined with the mistaken idea that military organization must be more efficient and therefore lower cost.”

All of which is quite true, and what’s more the writer has got it exactly right about the need to disaggregate by function. Big railroad companies have traditionally been a lot better running trains and fixing track than they have been schmoozing with customers and tailoring service to the need. Just suppose there were transportation marketing companies that would gather up bunches of freight cars for beneficial owners and then contract with trunk railroad companies to deliver those cars to some distant point according to some specific schedule.

That’s not all blue sky, either. Recall Illinois Central’s running premium-priced unit trains between the Midwest at the Gulf. These trains were pulled and placed on mutually-agreed schedules. IC had no gathering function and no dispersal function. The customer supplied the cars, the commodity, and set the service standard. Coincidentally, the scheduled IC ran the lowest operating ratio the industry has ever seen before or since.

That being said, it remains that much of the drag in the railroad process is in ratemaking and car supply. Happily, both functions are coming to the Internet. There’s a railroad e-commerce meeting in St. Louis this week, and my friend Tony Hatch will be presenting a paper linking e-commerce to shareholder value (to be posted here next week). On car supply, Rick Rockhold of Momentum Leasing has posted a paper on railcar liquidity challenges at www.rblanchard.com. It’s all coming together very nicely.

--Roy Blanchard

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