Citing a “tepid macroeconomic climate that is impacting all freight transport providers, including truckers,” Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl is lowering estimates and reducing price targets well before the railroads report fourth-quarter and full-year 2015 financials. Cowen has revised 4Q15 and 2016 earnings estimates downwards for most railroads, truckers and 3PLs (third-party logistics providers).
“Our changes reflect lower volumes than we had previously expected for the railroads,” Seidl said on Dec. 29, 2015. “We are lowering our estimates and revising our price targets for the rails largely due to weakness in traffic volumes quarter-to-date. Total North American Class I traffic is down 6% through Week 50.The key culprits include coal (15% of traffic), down 15% QTD; metallic ores and minerals (4% of traffic), down 28%; non-metallic minerals (6% of traffic), down 13%; chemicals (11% of traffic, including crude oil), down 6%; and intermodal (45% of traffic), down 2%.”
Seidl said he expects railroad results and outlooks “to be broadly weaker than previously expected when they report 4Q earnings. Hence, stocks could come under pressure. However, we would be buyers of higher quality names like Canadian Pacific, CN and Genesee & Wyoming. Additionally, we expect Norfolk Southern to hold in better than its peers given the acquisition premium built into the stock that is unlikely to go away in the near future. The Canadian carriers have half the exposure to coal relative to U.S. carriers and could continue to benefit from currency translations. GWR’s external growth prospects could be boosted by an active acquisition environment, including at the international level, while the new share repurchase program should support the stock, absent significant acquisitions.”
“We believe most rails will again temper expectations, due in part to the current energy environment and its effects on shipments of coal and petroleum products as well as the impact of a strong U.S. dollar on exports and industrial products demand,” Seidl noted. “On the bright side, we expect relatively positive commentary on consumer demand, automotive shipments, and housing products. All in all, we expect Wall Street earnings expectations for 2016 Class I rails EPS growth should come down slightly from 8% vs. our new 7% estimate. In this report,
CSX will be the first to report 4Q15 and full-year 2015 results on January 12th.