A FEW RAILS THAT COULD
By Terence Pare

(FORTUNE Magazine) – Streamlined from downsizing and well oiled with earnings, railroads steamed into 1989. But investors should think twice before getting on board. While several newly restructured lines look promising for patient money, the quick return will go to those spotting special situations. Says First Boston transportation analyst Graeme Lidgerwood: ''The best buys now are restructuring plays, where you can get a short-term pop from a big dividend payment or a share buyback.'' Rail traffic to date is running about 0.6% ahead of last year. That's well off the gains of 1988, reflecting lower grain shipments and slower growth in the overall economy. Last summer's drought reduced crops and ate into surplus grain stocks, leaving less to ship in 1989. Coal carloadings remain strong, up about 5% this year. The rates railroads charge customers, however, are being squeezed. Carriers have made headlines by cutting operating expenses and trimming labor forces. But the Interstate Commerce Commission recently ruled that part of the productivity savings must be passed along to customers. % Investors should examine the carriers that have not yet restructured. Burton Strauss, security analyst at Shearson Lehman Hutton, likes Consolidated Rail. It has little debt and generated nearly $700 million from operations in 1988. Stockholders were rewarded with a dividend boost to $1.10 a share last year, a 20% increase from the rate established in 1987, the year Conrail went public. Analysts see a bigger distribution this year or a stock buyback. Virginia-based Norfolk Southern is a similar play, with low debt and good cash flow, says Lidgerwood. Canadian Pacific is selling at book value, but the company has enormous forest products and real estate assets that it has held for a long time. ''You know those assets are vastly understated,'' says Michael Lloyd of Salomon. The firm estimates the breakup value of the company at $35 a share; it was recently selling for about $18. Investors who prefer their returns slow but sure may find the slimmed-down Burlington Northern and Union Pacific just the ticket. Burlington spun off its natural-resources unit last October, leaving it a tightly focused railroad. With a current yield of around 5% and a P/E of 7, based on the most recent four quarters of earnings, the stock has appeal for the long term, figures Lidgerwood. Union Pacific initiated a 14.5 million share repurchase in April. Analysts say that's not the last stop, but Drew Lewis, Uncle Pete's chief executive, has vowed not to rush into anything.