Based on the results of Cowen’s second-quarter 2104 Rail Shipper Survey, “The results affirm our positive view of the rail industry and may be an indicator of overall economic strength,” says Seidl. “Shippers expect their respective businesses to expand at an average rate of 6.9% over the next 12 months. This is 180 BPS (basis points) better than the 5.1% result recorded in our first-quarter 2014 survey, represents the third consecutive quarterly improvement, and marks the first time since second-quarter 2011 that the index broke 6.0%. All industry segments are expected to grow. In order of magnitude, the outlook for transportation, other traffic, forest products, metals, building products, and petroleum products improved from first-quarter 2014. The outlook for consumer products, chemicals, and agricultural products declined slightly from first-quarter 2014.”
“Only 21% of the shippers surveyed have pulled some freight forward in anticipation of a potential West Coast port strike,” notes Seidl. “This is a positive result for the rail industry, in our opinion, as it affirms our view that the ongoing robust traffic growth has only been aided in small part by freight that has been pulled forward. The response to this question also suggests that most shippers may believe that a strike is unlikely to occur.”
Railroad shippers anticipate an average base rate increase of 3.8% over the next 6-12 months, “which is a mere 10 BPS shy of the prior quarter’s survey,” says Seidl. “The second-quarter 2104 result effectively suggests that rail pricing continues be solid and that the cumulative 60-BPS improvement seen in second-half 2013 is likely sustainable. While the very slight 10 BPS second-quarter 2104 drop may not have statistical significance, it is also possible that the first quarter’s weather-related service issues, some of which lingered into the second quarter, affected shippers’ responses. As the carriers get closer to fully restoring their networks in the aftermath of one of the harshest winters in recent history, pricing should continue to be supported by solid underlying fundamentals. We favor our “Outperform”-rated Canadian Pacific, Union Pacific, Genesee & Wyoming, and Norfolk Southern going into earnings and note that our “Market-Perform”-rated CN could report strong results on robust traffic growth.”