Congress Still Loves Trains

WASHINGTON – It’s not buggy whip time yet, but America’s railroad supply industry has sure seen better days. Thomas D. Simpson, executive director of the Railway Supply Institute’s Washington office, reports that only 17,700 freight railcars were ordered last year, down from 70,000 to 80,000 in the late 1990s. Meanwhile, locomotive sales have dropped to just 400 per year from 1,200. “It’s been a tough slog,” he sighs.

But happily for rail suppliers, Congress still loves trains. Several proposals for revamping the nation’s rail infrastructure are now chugging around the House and Senate. And RSI, whose members range from industrial giants like General Electric and ITT Industries to smaller rail equipment manufacturers such as Greenbrier and Wabtec, is trying to make sure one of those proposals becomes law.

“There’s some hard work in front of us,” says Simpson, “but we can get something, and getting something is key.”

Atop the RSI’s legislative wish list is to have Congress establish a “Rail Finance and Development Corporation,” modeled on government-sponsored enterprises such as Fannie Mae and Freddie Mac. With a chief executive and a presidentially appointed board of directors, the entity would be authorized to issue $50 billion in federal tax credit bonds to states and private/public partnerships to finance rail projects. (Holders of these bonds get a tax credit, which provides an indirect federal subsidy for rail.)

Full story at Forbes.com

Salvage Operation

David J. Williams is a former Navy pilot. He has the stomach for flying close to the edge. The fund he comanages, Excelsior Value & Restructuring, invests mostly in companies trying to avoid a nosedive into oblivion.

Williams’ fund, one of the Excelsior funds advised by U.S. Trust, has 60% of its holdings in firms that are restructuring their balance sheets, selling divisions, laying off employees and the like. Another 20% are likely acquisition targets in consolidating industries. The rest are stocks that just look cheap.

In the ten-plus years since its founding, this no-load fund has grown to $1.6 billion in assets. Of late, performance has been fair: For the 12 months through June it gained 2%, against a 0.3% advance for the S&P 500. Williams admits he cleaned house in 2002, hitting the eject button on stocks like energy traders Calpine and Dynegy. “I had too much crap in the portfolio,” he confesses.

Nevertheless, the fund has a 15% annualized return over the past decade versus 10% for the S&P. FORBES grades it B for long-term performance in both up and down markets.

Williams, 61, got his start in the business at the tail end of the 1973-74 crash, joining T. Rowe Price as a portfolio manager following a post-Navy M.B.A. from Harvard. In 1987, when an ascendant Japan Inc. appeared to be eclipsing America as the world’s economic superpower, he signed on with U.S. Trust (now a subsidiary of Charles Schwab & Co.). There he concluded that American business would be forced to restructure in order to stay competitive in the global economy. This spurred the launch of Williams’ fund at the end of 1992.

One of its first bets was on a beaten-up IBM , then cutting deeply into its work force and posting breathtaking net losses: $6.9 billion in 1992 and $8 billion the year after. On a split-adjusted basis, IBM’s stock traded in the low teens, half its level five years prior. Williams bought. By July 1999 IBM shares were changing hands at $139. Williams has reduced his position in IBM since then but still owns it, along with a handful of other tech outfits. “The fundamentals really haven’t changed much for the better yet,” he muses, but “when they do, those stocks are going to fly.”

Full story (reg. required) at Forbes.com

Water Utilities’ Financial Thirst

You don’t have to look far to find statistics suggesting the United States’ water and sewage systems are in sorry shape. At the homepage of the Environmental Protection Agency’s Office of Water, for example, a report suggests the current pace of spending on drinking-water infrastructure falls $263 billion short of what’s needed over the next two decades.

Those kinds of numbers haven’t been lost on Congress, or, for that matter, stock investors who have taken a strong interest in companies working in the water business. Many of the stocks on the table below trade within a stone’s throw of their 52-week highs and carry price-to-earnings ratios above their five-year averages.

Among water sector winners: investor-owned water utilities. These include outfits like Philadelphia Suburban and SJW . The former company, the largest of its kind in the U.S., provides water and wastewater services to two million customers in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North Carolina. SJW owns San Jose Water, a utility supplying drinking water to a million people in Silicon Valley.

So why would Wall Street get so worked up about boring old water utilities? Mergers and acquisitions, for one. Not only has there been heavy consolidation among domestic players, but big foreign companies like France’s Veolia Environnement and Germany’s RWE AG have also gotten involved, paying significant premiums to buy U.S. utilities.

Another plus: The water utility business could well benefit from the outsourcing trend now evident in other government areas like defense and information technology. “The United States is probably the most attractive market from a privatization point of view,” says Phillipe Rohner, who co-manages the Pictet Global Water Fund, a portfolio devoted to companies in the water business.

Rohner notes that U.S. water utilities going private have the advantage of “the most advanced capital markets in the world” when it comes time to raise the funds necessary for infrastructure improvements.

But the National Association of Water Companies (NAWC), the industry group representing investor-owned utilities, complains U.S. policy still gives public utilities an edge. In a position paper, the group says that private water companies still “operate under numerous competitive disadvantages which include payment of federal, state and local taxes, and limited access to tax-exempt financing.”

Full story at Forbes.com

Freight Stocks: Riding The Rebound

WASHINGTON – With fuel prices stabilizing and manufacturing showing signs of recovery, transportation and freight companies have attracted investors. Since a mid-March low, transportation stocks in the S&P 500 have nearly kept pace with the 24% rise in the overall index.

So are there bargains left among the transports? We scanned the Multex database and found a few stocks that still look reasonable. Our criteria: price-to-sales and price-to-book multiples below five-year averages; latest 12-month sales of $400 million or greater; three-year revenue growth (annualized) in positive territory; and estimated annual earnings growth of 10% or better over the next three to five years.

Our screens snared a few passenger airlines, but we left out those more speculative bets in favor of air freight couriers, railroads and truckers. John Escario, manager of the Rydex Transportation Fund, thinks the latter group is particularly well-poised to benefit from an eventual economic recovery. “They’ve had to go through a lot of pain,” he says, noting that some 7,000 trucking outfits have gone bust since 2001. Result: less capacity, steadier prices and better cost control for the survivors.

Full story at Forbes.com

Government IT: Who’s Ready For A Deal?

Over the past year, consolidation among companies providing technology services to the federal government has been brisk, to put it mildly. “Unprecedented,” says David Heinemann, head of the Strategic Advisory Services Group at Input, a Reston, Va.-based market research firm.

In the first quarter of this year, Input tallied 18 merger or acquisition transactions among tech outfits selling expertise to the federal government. And the deals just keep coming. In late May, Fairfax, Va.-based Anteon International completed its $91 million purchase of Information Spectrum, a provider of identification card technology. Shortly thereafter, General Dynamics offered to buy Veridian, a network security engineering firm headquartered in Arlington, Va., for $1.5 billion.

All this deal-making is driven by the $45 billion that Uncle Sam spends each year on vendor-furnished information systems and services, a number expected to grow 8.5% annually over the coming five fiscal years. Input projects that by 2008, 87% of federal technology spending will get contracted out.

Both the growth prospects for the business and the consolidation frenzy have attracted investors. Anteon, for instance, trades just a hair off its 52-week high. In fact, some of these stocks have done so well, that some market watchers are nervous. For example, last month The Washington Post columnist Steven Pearlstein warned of a “Beltway Bubble About To Burst.”

Time to sell? Anteon Chief Executive Joseph Kampf, for his part, doesn’t sound alarmed. “There’s more consolidation to be had,” he says, pointing out that there are 3,000 companies in this marketplace, and even the largest players in the field hold market share numbers in the single digits.

Full story at Forbes.com

Seven Big Bets: Large-Capitalization Stocks

With the S&P 500 priced 16% below its 52-week high, mustering the courage to make an investment in a big company isn’t easy. In certain cases, however, it might be worth it.

What cases are those? Philip Tasho, portfolio manager of the ABN AMRO/TAMRO Large Cap Value fund, suggests looking for outfits with ample cash flow, healthy debt-to-capital ratios and consistent results. “Look at how the company has performed through good and bad times,” he says.

Full story at Forbes.com

Testing A New Stock-Picking Model

WASHINGTON – Anyone with a computer and data feeds can come up with an investment model. We normally don’t pay much attention to such methodologies unless they’ve been evaluated over a long period of time and with real money at stake. But we came across a relatively new idea, known as SPF, that seems worthy of being put to the test.

The inventor of this model isn’t a newcomer to the investment business. Joseph S. Kalinowski, the director of research for New York brokerage Puglisi & Co., has six years of experience, five of which were spent analyzing databases at IBES International, an aggregator of analyst estimate information. Kalinowski has been with Puglisi since May.

Kalinowski’s SPF is an acronym for “sentiment,” “persistence” and “fundamentals.” In each of these categories, he ranks stocks according to a variety of metrics. Taken together, the rankings produce an SPF profile signaling whether to buy, sell or hold.

Full story at Forbes.com

Freights Connect The Dots In Highway Bill

WASHINGTON, D.C. – In mid-May, Transportation Secretary Norman Y. Mineta pulled the wraps off the Bush Administration’s proposal for a six-year, $247 billion highway and transportation bill. The reaction from the road building lobby? Disappointment. But the freight and shipping industry had few complaints.

“We’re pretty happy about it,” says Joanne Casey, president of the Intermodal Association of North America, a group representing railroads, water carriers, ports, truckers and other freight outfits. “It’s a good starting point.”

The administration’s proposal is called the Safe, Accountable, Flexible and Efficient Transportation Equity Act of 2003, or SAFETEA. It addresses the reauthorization of the current law, known as the Transportation Equity Act for the 21st Century (TEA-21), set to expire at the end of September.

So why does the cargo crowd like SAFETEA? Several provisions in the bill zero in on the issue of intermodal shipping, or the seamless movement of containers from boats to trains to trucks. Most important, SAFETEA establishes dedicated funding to build out the so-called intermodal connectors, or roads that link the ports, airports and rail and truck terminals to inland interstates and highways. It also would make tax-exempt bonds available for freight projects and free up credit for private rail infrastructure investment under the Transportation Infrastructure Finance and Innovation Act, or TIFIA.

The freight lobby has been pushing for such provisions for years. Its primary argument: America faces a freight capacity crisis. That may be a hard one to believe these days, what with the nation’s manufacturing capacity at 20-year lows.

Full story at Forbes.com

Capital Spenders In The Downturn

WASHINGTON – If you want a grim statistic on America’s economic health, look at capacity utilization. A measure of the usage of the nation’s factories, mines and utilities, capacity utilization has dropped 10% since April 2000 and now sits at a 20-year low of 72%..

Despite the slack capacity numbers, some businesses have been ramping up over the past few years by increasing their capital investment and steadily adding to property, plant and equipment. It’s a risky bet, to be sure, but it may well look smart when the economy improves.

Example: American Woodmark, a manufacturer of kitchen cabinets with $499 million in revenue. For the latest 12 months, American Woodmark’s capital spending stands at $45 million, up from $23 million for the comparable period a year ago. On a five-year annualized basis, the company’s capital expenditures have risen 54%. The money has gone to projects such expanding assembly and finishing capacity at plants in five states.

Yet even with the capital-investment drive, American Woodmark has managed to keep its free cash flow (net income less capital expenditures plus depreciation) in positive territory. As its capital expenses fall, that free cash flow will likely get a boost, giving the company the flexibility to repurchase shares or pay down its modest $19 million in long-term debt.

So far, American Woodmark’s expansion has had mixed results. Profits have climbed from $4 million in fiscal 1996 to $32.2 million for the firm’s fiscal year ended April 2002. But year-over-year quarterly net margins have slipped from 6.2% to 4.9%. Shares have dipped accordingly–the stock trades 30% off its 52-week high.

Full story at Forbes.com

Bull, Unbowed

“We’re going to hit Dow 40,000 by 2016,” says money manager David Elias without blinking. It is not the first time he’s said it, either. Dow 40,000 was the theme and in the titles of his two books published in 1999 and 2000.Reviewers said they were a signal of a stock market about to go pop.

This time Elias’ call is all the more gutsy, flying in the face of greatly diminished expectations for stocks. The prediction is also more of a reach statistically. To get to 40,000 by December 2016 from where we are now, the Dow would have to sustain an annualized price gain of 13%. Starting from December 1999’s 11,400 level, it would have had to trot along at only 7.7%. To get a sense of how wildly bullish 13% is, note that over the past 100 years the index has climbed at a 5% rate.

And now we are contending with terrorism, volatile oil prices, high levels of corporate, government and personal debt, and a sluggish world economy. Mere mud on the hooves of history to Elias: “Over the last century we’ve had depression, recessions, the World Wars, all sorts of conflicts and tragedies,” he says, “and yet look at the long-term trend of the stock market. It’s up.”

Full story (reg. required) at Forbes.com