Drip Portfolio Report
Friday, October 10, 1997
by Randy Befumo (TMF [email protected])

ALEXANDRIA, VA (Oct. 10, 1997) -- Yesterday we established the valuations for two major competitors to KANSAS CITY SOUTHERN'S (NYSE: KSU) railroad operations, ILLINOIS CENTRAL (NYSE: IC) and WISCONSIN CENTRAL (Nasdaq: WCLX). Today we will use those valuations and the historical financials we developed on Kansas City Southern two weeks ago in order to figure out what a fair price range for Kansas City Southern Railway (KCSR) might be.

When I was thinking about the valuations we got yesterday for Illinois Central and Wisconsin Central overnight, I became concerned that both companies might be on the high-end of valuations in the railroad universe. To compensate, I have also totaled up some valuations on CSX (NYSE: CSX) as it is currently the cheapest railroad out there. Although I will not go through these numbers in detail today, for those of you who want to know how I figured then out you only need read the Drip Portfolio reports for September 19th, September 22nd and September 23rd. 

                   Ill. Cent.  Wisc. Cent.  CSX
Price/Sales           4.3        6.21        1.2
Price/Op. Earnings   11.7       27.3        14.5
Price/Cash Flow      10.0       22.3         9.0

The goal here is to set some valuation parameters that are low to moderate. In order to minimize any risk of getting too excited and overpaying, we will try to range the potential valuations between the absolute low for the industry and somewhere in the middle. This way, we have a middle and a worst case price for each valuation parameter and can get a really good picture of where KCSR might trade as a separate entity.

The smaller, more specialized railroads tend to trade with higher price/sales ratios. When looking at the PSR at CSX, it is important to keep in mind that there are a lot of non-railroad operations factored in. However, looking at the range, I would say valuing KCSR at 2.5 times sales would probably be fair, although 1.5 times sales would be a good lowball figure. On the operating earnings side, 10 would be a good lowball figure and 15 would be a decent high watermark. Finally, with the price/cash flow 9 seems like the low and probably 11 would be optimistic.

With the financials on KCSR, we can now peg some prices.

12-Month Revenues = $506.1 million

12-Month Op. Income = $75.3 million

12-Month EBITDA = $132.2 million

Based on sales, KCSR is worth $759.2 to $1.3 billion using 1.5 and 2.5 as the sales multiples. Based on operating income, KCSR is worth $753.0 million to $1.1 billion given the operating earnings multiples we developed. Finally, based on cash flow multiples the company is worth $1.2 billion to $1.5 billion. Thankfully, our valuations all cluster around the same area, with the low being $753 million and the high being $1.5 billion. Although this seems like a large range, it is much smaller than what I have previously found when doing these "sum of the parts" analyses.

With a fair price on KCSR, our next step is to put a fair value on the Financial Services operations. We will start this project on Monday.

TODAY'S NUMBERS 

  
              Stock   Close   Change
              Intel   $94 5/8   +1/16        

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%


        Rec'd   #    Security         In At      
       9/8/97   1      Intel         $94.69      

                          
                        Base: $700.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $549.10
                 Total Value: $652.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.