The results from Cowen and Company’s Fourth Quarter 2015 Rail Shipper Survey “continue to show demand weakness, a lack of confidence in the economy and that further truckload rate deterioration may still be catching up to rail pricing,” says Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “The results make us somewhat more cautious on the rail sector, but still feel that any material pullbacks in the shares may create unique buying opportunities in Norfolk Southern, CN and Genesee & Wyoming for longer term investors.”
“Railroad shippers anticipate an average base rate increase of 3.2% over the next 6-12 months, which is a 20 bps sequential decline and 160 bps below the prior-year rate,” notes Seidl. “This is the fourth consecutive quarter-over-quarter decrease in pricing expectations. This deterioration, albeit at a slower rate of change, is likely attributable to continued traffic weakness, making shippers feel somewhat more empowered in contract negotiations, as well as further softness in truckload rates. This is likely continuing what we think may be pressure on intermodal pricing as intermodal volumes experienced their first quarterly decline in 6 years during 4Q15.”
“Business growth and headcount outlooks also deteriorated, while 71% of respondents are as or less confident in the economy today than they were three months ago,” says Seidl. “29% are more confident in the economy now vs. the 26% in our 3Q15 survey. Consumer product companies experienced the biggest deterioration in growth expectations, while building products, chemicals and petroleum products companies expect to grow at a slightly faster pace than they did in our prior survey.”
“These results make us somewhat more cautious on the rail sector going into earnings season,” concludes Seidl. “While ongoing cost management, share repurchases, and fuel prices should help offset traffic weakness in 4Q15, investors are likely to react more to outlook commentaries than 4Q15 results. Motor vehicles and ‘other’ remain the only bright spots in carloads as challenges remains in coal, metals, and crude oil; and with intermodal volumes weakening and pricing potentially showing some cracks, the rails may be facing an uphill battle in 2016. That said, with rail stocks down more than 30% on average since their early 2015 highs, any further material pullbacks during earnings season could create unique buying opportunities in our Outperform-rated stocks. We still favor Genesee & Wyoming for its external growth and significant stock pullback as well as NS. We like CN due to the company's strong operating margins, lower exposure to coal than U.S. carriers, and a favorable currency environment.”