The Blanchard Company--Week in Review 11/18/00

The Railroad Week in Review:
Week ending November 18, 2000

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Two conversations - one inside the company, the other outside -- want to talk to each other. They are speaking the same language. They recognize each other's voices. Smart companies will get out of the way and help the inevitable to happen sooner. Cluetrain Clues 56, 57.

RailAmerica (RAIL) has completed the final phase of its $100 mm program to sell off non-core assets. This week the firm inked a definitive agreement to sell the Texas portion of specialty truck trailer maker Kalyn/Siebert. The buyer is the Heil Company and the price is reported to be $33 mm, thus bringing RAIL within striking distance -- $84 mm by my calculation - of the goal. Also this week RAIL signed letters of intent to sell the K/S operation in Quebec plus another non-core railroad for about $16 mm, rounding out the $100 mm figure. Nice going.

On Tuesday RAIL posted 3Q00 results. The earnings release notes higher revenues, income, EBITDA (earnings before interest, taxes, depreciation and amortization) and carloadings -- all positive factors. However much of the increases are directly attributable to the RailTex purchase in Feb and the acquisitions of the TP&W and RaiLink in 3Q99. Thus let's do what we do with rapidly growing Internet companies: look for positive and consistent trends over six consecutive quarters of sales, operating and net incomes, and net margins YTY and quarter-to-quarter.

Sales for the quarter hit $91 mm, up 129% YTY. Operating income rose 141% and the net nearly doubled. Now look at the trends among successive quarters. Starting with the change from 2Q99 to 3Q99, sales were down 2.3%, up 21.4%, up 66.6%, up 20.0%, and down 5.3%. Operating income was up 3.2%, up 31.5%, up 61.2%, up 69.7%, down 33.0%. Net income was up 19.7%, down 18.4%, down 218.6%, down 337.4%, and down 96.9%. The net margin high point over six quarters was 8.3% in 3Q99, dropping to 0.3% in the quarter just ended. Ideally, one would hope to see trends smoothing over the next few quarters.

The aggressive acquisition program has taken its toll on debt ratios and interest coverage. A year ago LTD plus current portion was 234% of equity and 68% of total capitalization. Now it's 371% and 76% respectively. What is most bothersome is the interest load. That obligation remains regardless of revenues or net income, so a little cushion between operating cash flow (OCF) and interest expense is always welcome. Some analysts say OCF plus taxes should be at least 1.2 times interest expense. RAIL is now at 1.1 times vs. 3.6 times a year ago.

Looking ahead, as RAIL sheds the non-core assets and zeroes in on the quality rail properties one should expect North American revenues to grow in the 5-8% range in 2001, slightly ahead of the class 1s thanks to the shortlines' strengths in service delivery. Rail operating ratios in both North America and Australia dropped 3+ points YTY. This spread absent the drag of non-performing properties bodes well, I think. Get the debt paid down, get a greater margin of safety for interest payments, and even out quarterly changes (above) and RAIL will have a shot at recovering the 21% loss in share price YTY.

The Wisconsin Central shareholder saga continues. The Company is soliciting revocations of consent in opposition to the solicitation of consents by a group of dissidents led by former CEO Ed Burkhardt (the "Burkhardt Group"), which is seeking to replace the WC board with its own nominees. In a significant development, WC's second largest shareholder, the State of Wisconsin Investment Board (SWIB), said it supports the present company's current directors and will withhold its consent from the Burkhardt Group.

According to International Railway Journal (www.railjournal.com), the Burkhardt Group is:

John W Barriger, vice-president of a firm of personnel consultants and a former manager of the Santa Fe Railway ·
Raymond C Burton Jr., chairman and CEO of TTX ·
Robert E Dowdy, transport consultant and former president and CEO of Fox River Valley, Green Bay & Western, and Belt railways ·
Aaron J Gellman, professor of management and strategy at the Kellogg School of Management ·
Michael W Howell, chairman of a group of industrial machinery manufacturers and former marketing director of RailTrack ·
Henry Posner III, chairman of Railroad Development Corporation, and ·
Andy Sze, managing director of Ginkgo Enterprise and former president and CEO of the Clipper Group.

To summarize past announcements, here's what WC has done recently for the shareholders:

As announced on November 3, 2000, retained Goldman, Sachs to act as financial advisor to the board in evaluating its strategic options. ·
As announced on November 9, 2000, retained Deutsche Bank as financial advisor in connection with the potential disposition of shares in Tranz Rail Holdings Limited. ·
In September 2000, restructured North American operations, the first initiative coming out of an internal strategic review, which included simplifying organizational structure ·
Since March 21, 2000, repurchased 10 percent of the shares outstanding.

Raildom's best stock performer YTD is GNWR, up 114%, and the October carload report is in. North American carloads in October 2000 were off 3% to 30,811 YTY while Australia, on the other hand, saw a 50% increase to 21,063. This healthy jump is due entirely to GNWR's December iron ore contract with Broken Hill and completely offsets losses elsewhere.

Do you stay up worrying that your workers may be cruising the Internet on your nickel? BNSF is one company that actually encourages employee web-surfing. It has teamed up with Abilizer ™ to create its "Life at Work" employee portal. Pages include sections on Family activities, home and garden, personal finance, shopping, upcoming events, and stock quotes. Says the intro page, the purpose of the site "is to provide the resources you need to achieve equilibrium between the tasks you have at work and those you have at home. [BNSF] understands the value of doing this, especially since the lines between our professional and personal lives are becoming increasingly blurry." Looks like BNSF is yet another Cluetrain believer.

--Roy Blanchard

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