Leverage at Work

Although industrial stocks were 7% below their 1941 highs on the New York Stock Exchange, many railroad shares last week set new price levels for the year.

Railroad bonds rose even farther than stocks. Such second-rate liens as Missouri-Kansas-Texas (Katy) 4s and 4 1/2s, Southern Pacific 45, were bought in large blocks. Thanks to Wall Street's year-old mistrust of the defense boom, the abrupt conclusion of which might send many railroads into bankruptcy, these bonds could be bought at prices to yield as much as 20%. Wall Street still distrusts the boom. But it could not overlook the rising curve of railroad traffic.

Since railroad overhead costs are both large and inflexible, an abrupt rise in car-loadings means an even sharper rise in railroad profits. Once the break-even point is passed, "leverage" carries much of the increase in gross directly to net. Thus February carloadings of all Class 1 roads were 23% over 1940, but net operating income (profit before interest and taxes) rose 75%. Two other bullish points are labor and taxes. Shielded by intricate Federal machinery, the railroads have not had a big strike since 1922. By taking the 8%-on-capital option of the excess-profits tax, most railroaders (who have not earned 8% for years) are not required to pay any. Some individual reports:

> From paper mills, cement plants, Army camps Atlantic Coast Line gets many new tons of industrial freight. February gross was $5,629,000, 15% over 1940, best since 1931. But net operating income jumped 74% to $1,145,000.

> Atchison, Topeka & Santa Fe's February gross was $13,878,000, largest since 1930, up 25% from last year. But leverage boosted operating net 350% to $1,995,000.

> Chicago & North Western, in bankruptcy since June 1935, has suddenly begun to make money on its old capitalization. Its February gross was $6,913,000, up 8% from last year, while its operating net rose from a $288,000 deficit to $624,000 profit.

> Reorganized last year, Gulf, Mobile & Ohio (The Rebel Line) is proving what financial housecleaning can do. February gross was $1,599,000, up 14%; operating income was $218,000, up 350%.

> Known for 50 years as the Potato Road, Bangor & Aroostook suffered with Maine farmers, last year skipped its common payment for the first time since 1904. But this year booming shipyards and revitalized textile mills are filling some of the cars once loaded with potatoes. When February gross increased 9% to $558,000, net operating income was up 30% to $155,000.

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