Jason Seidl: Pricing expectations slow

Rail price increases will come at a slowing rate over the next 6-12 months, says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. This marks the fifth consecutive quarter of moderation as shippers are expecting rates to rise just 2.9%, according to Cowen’s 1Q2016 Rail Shipper Survey.

“Railroad shipper economic confidence levels are higher and growth expectations have improved,” says Seidl. “Shippers surveyed (the full report can be downloaded at the link below) anticipate an average base rate increase of 2.9% over the next 6-12 months, which is a 30 bps sequential decline and 180 bps below the prior-year rate—the fifth consecutive quarter-over-quarter decrease. This deterioration is likely attributable to continued traffic weakness making shippers feel somewhat more empowered in contract negotiations as well as further softness in truckload rates.

“Business growth and headcount outlooks improved compared to our prior survey, while 47% of respondents are more confident in the economy today than they were three months ago. That's up from 29% in our 4Q15 survey. Metals companies experienced the biggest improvement in growth expectations vs. last quarter. Transportation, Forest & Paper Products, Agriculture and Chemicals companies expect their businesses to grow at least 5% over the next 12 months.

“The results keep us somewhat cautious on the rail sector going into earnings season. While ongoing cost management, share repurchases and fuel prices should help offset traffic weakness through the rest of the year, investors are likely to react more to outlook commentaries than 1Q16 results. Motor vehicles remain the only bright spots in carloads as challenges remains in coal, metals, and crude oil; and with intermodal volumes barely growing the railroads will be facing an uphill battle in 2016. That said, with rail stocks down more than 24% on average over the past 52 weeks, any further material pullbacks during earnings season could create unique buying opportunities in our Outperform-rated stocks.

“We still favor Norfolk Southern and Canadian Pacific. Now that the NS deal is off the table, CP will be re-focused on its own operations and buying back stock. Based on 1Q16 service metrics, CP and NS ran the most efficient operations with respect to dwell times and train speeds.”

For further analysis on shipper leverage and truckload pricing, see the Chainalytics-Cowen Monthly Freight Demand Indices as well as Cowen’s takeaways from the recent conference call it held with several private third-party logistics and truckload company executives. Links to both reports are below.