“Pricing expectations have risen despite crude oil and service challenges,” said Seidl. “Railroad shippers anticipate an average base rate increase of 4.8% over the next 6-12 months, which is 60 basis points higher than our prior quarter’s survey and the second consecutive time that pricing expectations have increased since our 4Q13 survey. What is noteworthy about this uptick is that it occurred despite slowing crude growth and ongoing issues with rail service, which has not improved from last quarter, according to 78% of our survey participants.”
Though growth expectations are lower, they are “still robust,” noted Seidl. “Shippers expect their respective businesses to expand at an average rate of 6.3% over the next 12 months. This is 130 basis points below the 7.6% result recorded in our 3Q14 survey, but still represents strong growth. All industry segments are expected to grow. In order of magnitude, the outlook for consumer products and metals improved from 3Q14, while the outlook for transportation, petroleum products, other shipments, agricultural products, building products, forest products, and chemicals declined.”
“It appears that the recent decline in energy prices has been beneficial to most shippers,” Siedl pointed out. “About 80% of respondents indicated that the impact of such a decline has been positive for their top lines, possibly due to increased demand, driven by freed-up capital. Only 20% of shippers noted a negative impact.”
What could this mean for railroad stock prices? Said Seidl: “We favor our ‘outperform’ rated Union Pacific and note that our ‘market perform’ rated CN could also report solid 4Q14 results on robust traffic growth and better service ratings than some of its Class I peers. The survey results also bode well for J.B. Hunt, in our opinion. The service improvement at the company’s largest western rail partner, BNSF, coupled with our recent channel checks, which indicate that J.B. Hunt is implementing robust intermodal rate increases, should drive margin expansion for the carrier.”