The Railroad Week in Review:
Week ending September 23, 2000

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A healthy intranet organizes workers in many meanings of the word. Its effect is more radical than the agenda of any union. While this scares companies witless, they also depend heavily on open intranets to generate and share critical knowledge. They need to resist the urge to "improve" or control these networked conversations. Cluetrain Clues 45,46

Wall Street Journal Rail Reporter Dan Machalaba writes (9/18) that NS is looking at getting back into the line sales business. NS is reviewing its branchline holdings to see which have sufficient potential to warrant the marketing and capex required to keep them viable. Most of the lines, says Machalaba, "Are relatively short branch lines, primarily in the Southeast, that Norfolk Southern could lease, sell or abandon."

Long time rail watchers will recall NS was one of the first out of the box 15 years ago with its "Thoroughbred Leasing Program." The railroad placed several thousand branchline miles with area shortline operators, preserving the revenue stream and the property while turning new business development and operation to local firms. More than a few of the lines went to RailTex and ultimately RailAmerica where they are profitable to this day.

Logically, all line leases and sales ground to a halt with the onset of the Conrail Transaction in late 1996. Now, four years later, and one year after Split Date, NS has begun to sort out what it has and what it needs to keep. The revenue/capex mix is a major determinant, just as it was with Conrail. NS told Machalaba 300-400 route miles are under the microscope.

Elsewhere, NS is looking for a hundred or so souls in engineering and mechanical to take "voluntary severance." Clearly NS is under the gun to improve financial performance as the stock languishes around $15 and change, having flattened to the extent that the 200-day and 50-day moving averages have converged at about $17.

And when the Merger Moratorium has passed, which will make the better bride? The slim one, right-sized to the traffic base or the more ample sample still carrying more assets and help than she needs to do the core work? Rocket scientists need not reply.

Over the past few weeks the WIR Cover Letter has carried a number of challenges. And once again the response has been at once thoughtful and gratifying. Regarding stock prices, a plastics shipper writes, "In the spirit of improving the industry, perhaps we should ask this question: If the stock prices suddenly doubled and the equity was worth twice as much as before, would this spark a round of borrowing to expand and grow? What are the new frontiers? Is it just to buy out their competitors or is it to grow the business and be the solution? Opinions from both railroads and shippers would be very much welcome."

Regarding customer service, an institutional investor in NYC writes, "Recently I took an extended auto trip along Interstates, NY to New Orleans, across Florida, and back. Once again I was struck by how many small trucking companies there are, and how the majors have such a small and shrinking share. This is important to railroads. The small truckers exist because of customer focus. The rails point to truckers as the competition. But it is not JBHunt or Schneider or Werner or ABF or Landstar. Rather, it is the non-bureaucratic guys focused on customer service.

"All the accounting and financial merger synergies are meaningless when anyone can outsource Price Waterhouse and GE Capital, same with legal and managerial services. The only thing that counts is customer service, and large bureaucracies stand in the way. Sure, seamless transportation is important to American President Lines and Ford Motors, but large customers are notorious for not paying well. It is the aggregate of medium-to-small customers that have attractive margins and account for the bulk of business. As proof, just look at how much 'expensive' trucking they are attracting!"

The common thread between these writers has to do with growing the revenue base by giving customers the transportation product they really want. And successive quarters of accelerating revenue growth are what today's investors expect. And double-digit free cash flow margins are not far behind.

What some might call a promising sign is the decline of short interest for railroad stocks over the past month. By way of review, the level of short interest can be taken as a measure of investor confidence that a stock will decline. Investors who sell stock short essentially borrow it from their brokers, sell it, and hope to repay the broker by purchasing the stock at a lower price later on. Short interest is typically measured by the number of days trading at the average daily volume needed to cover the number of shares shorted.

Most NYSE rail stocks' short interest declined in the last month: BNSF down 37.6%, CSX down 6.1%, KCS down 4.9%, NS down 16.9%, and UP down 5.2%. To be sure, shares are often shorted for other reasons, however big declines, as in the case of BNSF, can be taken as a good indication of increased investor confidence. BNSF closed Friday at $20.94, off 36% from the $32.75 high for the trailing 52-week period.

With the stock trading at a mere 8 times earnings against the broader market's 25 multiple, it's not surprising this week BNSF authorized another 30 mm shares for its buy-back program, bringing the total program to 120 mm shares. There were nearly 400 mm shares outstanding 9/21.

CSXT is implementing a "fuel cost recovery charge" effective October 25 and it will apply to local as well as interline freight movements. The recovery charge will be applied to all traffic moving under tariffs, private price quotes and certain contracts that incorporate those general tariffs. Contracts that contain a price escalator index published by a government entity, such as RCAF, will not be included. A press release notes "CSXT's total fuel bill for the year will be about $265 million more than it paid for fuel in 1999. This action is needed to provide a continuing higher level of quality service to its customers."

The other shoe finally dropped in the latest round of labor contract negotiations. The UTU says in a short press release that they and the railroads reached a tentative agreement 9/21. It's the first labor agreement to be reached by the carriers and any of the 13 standard rail unions taking part in the current round of bargaining, which began last November. The agreement covers train and engine service employees and yardmasters, who make up nearly one third of the railroads' work force. The railroads include the nation's largest carriers, covering approximately 95% of all Class I unionized employees.

Wisconsin Central came out with a major press release Thursday, covering a host of key items from restructuring of the North American operation to the share buyback program to privatizations to the outlooks for EWS and TranzRail. Says Pres and CEO Tom Power, "The Board is committed to delivering double-digit annual share value gains. Our commitment to shareholders is that we will not invest or will disinvest where we cannot build value."

In what ought to be regarded as a very forthright announcement, the only negative was an earnings warning of a sort. WC will take a $1 million pre-tax restructuring charge in 3Q00 putting its net income "near the bottom" of the current estimate ranges, say around 30 cents vs. 36 cents in 3Q99. Trading closed Friday with WC at $10.81, down 33% from the 52-week high. Readers are urged to see the full story at www.wclx.com. It's an excellent and informative picture of the company's position on a variety of issues.

--Roy Blanchard

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