The Railroad Week in Review:
Week ending April 8, 2000

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That's Thesis Number One of the 95 theses nailed to the door of the cluetrain.com website. WIR first mentioned this site (and the book which followed it) on 3/18 and asked readers to comment on clues they thought our industry could use. The response was most heartening. So for the next 94 weeks WIR will open with another Cluetrain Clue. With any luck there won't be an empty seats by the end of our journey.

Another topsy-turvey week it was as tech investors swapped into Old Economy stocks and the rails held their own, more or less. In the midst of the maelstrom GNWR reached a new 52-week high on no new news. The 10-K for 1999 has emerged, however, and it makes for some interesting reading. Compared with WCLX, RAIL, and PWX, our friends at GNWR have drifted into third place in operating ratio, net margin, and free cash flow (FCF) margin.

This last, FCF margin, is a new one to WIR. It seems to me increasingly important to keep one's eye on the cash. The extra charges and gains, taxes, and the other stuff always seem to fall between operating income and net income, causing the latter to rise and fall not necessarily in the same direction of the railroad's operating income. And they don't say much about how the money is made. FCF Margin does. It's simply operating cash flow from the Cash Flow Statement less additions to property and equipment etc.

Ideally, the FCF margin should be the same or better than the net margin. Unfortunately, our shortline friends are spending on average 85 cents of every revenue dollar just to keep the doors open. But it's not, and it's often negative. Operating cash flows less than 20% on revenues in the mid-hundreds of $millions doesn't give you much to go out and buy things.

So when GNWR plunked down $58 mm in net property additions for interests in Canada, Australia, and Mexico, operating cash flow could provide only half the needed nut. The result is a negative FCF margin, minus 16%. A year ago, with property additions running at 2/3 ops cash flow, the FCF margin was 4.4% against a net margin of 7.8%.

But wait. There's more. One must go beyond the financial statements to see how well a target company uses the tools at its disposal: talent, locomotives, and track. Number of employees, serviceable locomotives, revenue carloads, and route miles (not track miles) are available in some combination of website and SEC filings. Constructing a ratios table to compare companies will show that GNWR does a respectable job. More on this in a future issue.

A vendor we haven't heard much from of late is Wabash National (NYSE: WNC). This week WNC said it will achieve another milestone for its proprietary RoadRailer(TM) system with the display of the ten thousandth RoadRailer trailer at the upcoming Intermodal Expo. The trailer, a 53' DuraPlate(TM) RoadRailer dry van, is part of a 200-unit order currently under production for Amtrak. Following the display, the unit will go into service on Amtrak's fast-growing Mail and Express high-speed network.

Recent orders for RoadRailer equipment total approximately $19 million, which includes dry vans for Amtrak and Canadian National Railroad, as well as 53' ReeferRailer trailers for GATX Capital (BNSF's ICE Express) and Clipper Controlled Logistics. Current RoadRailer owner/operators include Norfolk Southern's Triple Crown Service, BNSF, CN, and Amtrak. RoadRailer trains are also operated by Union Pacific Railroad (for Swift Transportation) and Canadian Pacific Railroad (for Triple Crown).

Wisconsin Central feels so strongly about the prospects for the English, Welsh & Scottish Railway Holdings Limited (EWS) that it has increased its ownership to about 42% of outstanding shares, up from 39%. The transaction was valued at US$6.2 million. Funding was from the Company's existing credit facilities. EWS has been profitable from Day One so Tom Power and company obviously believe this to be an excellent investment, now worth about $US91 mm in all.

Having made two pilgrimages to the EWS in as many years I can say it's a fascinating operation with many lessons for US rail operators, from customer service team design to scheduled operations. It's working, too, as at the time of privatization, rail had little more than 5 percent of Great Britain's total freight transport market. By 1998 (the last year for which government figures are available), rail's share had already increased to more than 7 percent, a 40% gain from the base year traffic.

Back in the US, WC had the lowest operating ratio (75.2), the highest net margin (18.4%), and the lowest debt ratios of the major US non-class 1 railroad companies, except for PWX which zeroed out its debt last year. With respect to overseas, a friend in Australia who's paid to watch this sort of thing writes, "WC appears to have been quite successful in introducing efficiencies, reducing costs and building business while aggressively looking for acquisitions in Australia." It all fits rather nicely, doesn't it?

Finally, two notes of encouragement. The new "Introduction to Investors" presentation at www.wclx.com is a knockout. And I guess investors are reading and believing. Friday for the first time since Feb 22 WCLX traded above its 200-day moving average. Recall that crossing the 200-day average on the way up is taken by some as an encouraging sign.

Financial writer Evelyn Twitchell's thesis in Barron's Weekday Trader for April 6 is that the market's recent extremes has investors looking once again at the basics: earnings, sales growth, cash flow. Near-term prospects for energy and basic materials stocks call for accelerated growth rates as these industries recover from their recent doldrums.

There may be something to this. Over the past six months the DJIA has declined nearly 50% while Exxon, Alcoa, and Tosco, to name three, have been up by 5-25%. Forest products leader Weyerhaeuser, mentioned in the article, has neither gained nor lost however the eps consensus for March figures it's set for a 78% improvement over 1Q99 and for the year a 33% improvement. Yet it's trading at 13 times the FY2000 estimate.

The same thing can be said for certain class 1 railroads. FY2000 estimates see increases ranging from 23% (UNP ) to 78% (NSC). Concludes Barron's, "It's more of a cyclical rebound from depressed levels than anything else. If investors once again start looking more at companies' bottom lines than at their stock-price moves, some once-shunned sectors could become all the rage again."

Front Page headlines screamed, "Train Hits Schoolbus. Three Kids Killed." A week later, in small print, "The driver of a school bus struck by a freight train did not observe warnings before crossing the tracks, according to a state police report released Wednesday. According to the Tennessee Highway Patrol report, the driver failed to obey traffic signs posted at the railroad crossing and did not observe other warnings, such as the train's whistle blowing." Now just who was responsible do you think?

--Roy Blanchard

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