KeyBanc Capital Markets attended the 2016 Rail Equipment Finance Conference, and after numerous presentations from railcar OEMs, lessors, shippers and finance companies, believes that the industry is transitioning to a more “normal” demand level.
“The tone was cautious as industry participants nervously consider the effects of lower rail volume, higher velocity and oversupply conditions for energy-oriented railcars serving crude oil, frac sand and coal,” noted KeyBanc’s Steve Barger. “There was some optimism, however, around ‘consumer’ facing cars including intermodal, autorack and boxcars. There was also an expectation that demand for plastic pellet cars and some types of tank cars could improve, although we expect some of that could be supplied via backlog conversions rather than new orders.” This translates to “a normalization in demand trends toward non-energy-oriented car types, and expectations for lower orders and deliveries in 2016 and 2017.”
Barger believes a combination of secular (coal) and cyclical changes are resulting in lower railcar loadings. “The rolling 12-week average of year-over-year volume changes is currently a negative 14%,” said Barger. “While the past few weeks have shown some signs of volume stabilization, lower volume has resulted in higher average train speed. Faster trains mean faster asset turns and reduced need for cars online.”
“While we are not changing ratings, we think Greenbrier is the best-positioned OEM for current conditions,” said Barger. “Additionally, we are reducing estimates for GATX and Wabtec. From a valuation and catalyst perspective, we still favor Greenbrier and Trinity over ARI, GATX, FreightCar America and Wabtec.”