Shipper survey: Rail equipment outlook not as bad as perceived

Half the rail shippers queried in Cowen and Company’s 1Q16 Rail Shipper Survey say they will or may place orders for freight cars in the next twelve months, according to Cowen and Company analyst Matt Ellkott. “Add eventual opportunistic buying by lessors/investors and some equipment replacement by railroads, and order levels may see upside from the current subdued expectations.”

“On the heels of our Dec. 14, 2015 initiation of the rail equipment sector, we beefed up the railcar section of our quarterly rail shipper survey (which can be downloaded from the link below), adding several nuanced questions to gauge shippers’ equipment order plans,” said Elkott. “Just over one-third of shippers said they planned to order railcars in the next twelve months, with another 14% noting that they may do so. This brings the total percentage of shippers who will or may place equipment orders to 48%, or roughly half those surveyed.

“Given the subdued, if not grim, expectations for the industry by most observers, we believe these results are relatively positive and consistent with our view that the overall weakness in industrial markets could be partly offset, in a meaningful way, by a number of factors, not the least of which is replacement demand for certain car types such as boxcars and gondolas. Indeed, these two types represented about 30% of potential orders in the next twelve months. Hoppers represented 41%, likely driven by strong large cube covered hopper demand, and tank cars came in at a respectable 29%, likely driven by non-crude-specific tanks.

“Of the respondents who said they will or may place equipment orders in the next twelve months, 75% said their orders would be for fewer than 500 cars, 6% said they may order 500-2,000 cars, with the remaining 19% potentially placing orders for more than 2,000 cars per respondent. Shippers remain concerned about boxcar availability, with 33% of them (35% in our 4Q15 survey) saying boxcars are in tight supply, but concerns about gondola availability intensified most, with 13% of shippers now saying they are concerned about that car type’s supply, compared to none in our previous survey.

“All in all, the equipment section of the survey is a net positive for the OEM industry, but especially for Trinity and Greenbrier, which build all the railcar types that could see solid demand in the next twelve months. One can deduce that roughly 62% of the shippers surveyed have equipment needs, including 34% who have plans to place orders, 14% who may place orders, 7% who have equipment needs but do not plan to place orders in the next twelve months due to capex restrictions, and 7% who have equipment needs but do not plan to place orders due to economic and regulatory uncertainty.”