Near-term outlooks from Class I railroads at upcoming conferences “will contain a somewhat more pronounced level of caution given further softening in volumes since first-quarter 2016 earnings,” according to Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. Following is an analysis released May 12, 2016:
“When the railroads reported 1Q16 results in mid to late April, volumes had been trending down about 7% year-over year. After six straight weeks of double-digit y/y declines leading up to 1Q16 earnings calls, there’s been another three weeks of further 11-12% y/y deterioration. The latest results for Week 18 suggest volumes are now down 8% y/y through May 7. Most of the pressure year-to-date is being felt with coal, non-metallic minerals (which includes frac sand), chemicals (which includes crude oil) and metals. Those three broad categories make up about one-third of the North American rail industry’s volumes and are down 16% on average YTD. Union Pacific is seeing the most pressure on its business with volumes down 11% y/y, driven by coal, non-metallic minerals and intermodal volumes that are 36%, 14% and 7% below last year’s levels, respectively.
“The key industry verticals that have slowed since mid-April are intermodal, metals and motor vehicles. There’s no question that motor vehicles remain a bright spot, with carloads still up more than 8% YTD, but growth has recently slowed and could continue to be stunted from here. The value proposition for intermodal has waned a bit as truckload pricing is under pressure and diesel fuel prices are more than 20% below last year’s level. Intermodal volumes are now 2% below last year’s level, down 100 basis points from when the railroads reported 1Q16 results. After a strong start to the year, industry intermodal volumes have fallen an average of 9% over the past nine weeks. CSX has the most exposure to motor vehicles (7% of company volume), Norfolk Southern has the largest exposure to intermodal (52% of company volume) and CN carries the largest share of metals (12% of company volume). Over the longer term, however, we believe this volume will flow back to the railroads and have been encouraged by the lack of any notable rate discounting by the railroads.
“We aren’t revising our forecasts just yet as it is still early in 2Q (latest data is through May 7), but we do think it is important to acknowledge which railroads are lagging the furthest behind our estimates quarter-to-date. CN, with volumes down 14% QTD, is the biggest laggard relative to our forecast of -7%. NS and Kansas City Southern are trailing our growth assumptions by 600bps and 500bps, respectively, while UP, CSX and Canadian Pacific are 100-400bps behind. However, NS does remain one of our favorite Outperform-rated stocks
“We expect only minor disruptions to the rail networks of CP and CN as a result of the tragic Fort McMurray wildfire. However, longer-term these railroads could see a traffic uptick as the cleanup and restoration process unfolds.”