As the industry continues to weather the current economic storm, Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl offers the following analysis:
“We’re adjusting estimates for much of our rail coverage ahead of 2Q16 results. We’re lowering our 2Q16 EPS ests for the Class I’s, given updated carloads and service metrics. We’re modestly raising our estimate for GWR (Genesee & Wyoming). Strong service levels will continue to be a positive theme on earnings calls and will likely offset some of the volume pressure on operating ratios.
“We are lowering our 2Q16 EPS estimates for the Class I’s by an average of 5% and modestly raising GWR by 3% largely due to differences between our prior carload estimates and actual weekly results for the quarter. We also adjusted our operating ratios to reflect a temporary headwind from fuel expense, given the 9% sequential increase in the price of diesel from 1Q’s average level (recall there is a 40-plus-day day lag in fuel surcharge recovery at the railroads).
“All of the Class l’s provided better service in 2Q16 vs. 2Q15. In fact, CSX recently said its on-time levels on an all-in basis were at 91% with intermodal being even higher. On average, train speeds were up 8% y/y and dwell time was down 4%. That compares to a 1Q16 improvement in both train speed and dwell time of 11% and –9%, respectively. We think this is largely due to lower volumes as total North American carloads are down 10.4% in 2Q16 through Week 23 (June 11). YTD, carloads are down 8.2%. Coal remains under the most pressure, down 31.4% QTD, followed by metals and chemicals, down 16.6% and 9.9%, respectively.
“We do not expect outlooks to be broadly weaker than buy-side expectations given our recent conversations with investors, the subdued outlooks the railroads gave in their 1Q16 releases, updated commentary at conferences and public forums throughout 1Q16 along with the weekly carload data. However, it is worth noting we are below sell-side consensus estimates for CN, Canadian Pacific, Kansas City Southern, Norfolk Southern and Union Pacific. We are slightly above 2Q16 consensus for CSX and GWR.
“We expect the railroads to generally focus on the improvement in their service levels during earnings calls (i.e. that which they can control). In addition to the better dwell times and train speeds, our private industry checks suggest overall service is much improved. Importantly, carload comparisons are easy for the remainder of the year, so while year-over-year growth may begin to improve, we are going to focus on sequential changes to gauge the true health of the business over the near term. Typical seasonal trends would suggest carloads should be up 2%-4% on a sequential basis for the next two weeks. That would imply year-over-year industry declines of about 2% over that time period, much better than the average weekly year-over-year declines of 8% the market has experienced this year.
“In an effort to right-size their organizations, railroad management teams are continuing to lay people off at accelerating rates. In 1Q16, employees on U.S. railroad payrolls fell 10%. In April and May, railroad headcount fell by 12% year-over-year or 1% from the end of 1Q16.
“Trucking prices still remain depressed, making the intermodal value proposition more difficult to sell in this environment. Fuel prices also remain low, down 18% year-over-year, which decreases the likelihood of highway-to-rail conversion. Industry intermodal volumes are down 3% YTD and 7% in 2Q through June 11th. Our latest Chainalytics-Cowen Freight Demand Indices (downloadable below) show that spot market pricing remains 1%-9% below the newly lowered contract rates. We think the truckload market could tighten up a bit in 2H16, which should alleviate some downward pressure on intermodal.
“Total North American Class I traffic is down 8.2% through Week 23.The key culprits include coal (12% of traffic), down 31% YTD; metallic ores and minerals (4% of traffic), down 16%; non-metallic minerals (5% of traffic), down 9%; chemicals (12% of traffic, including crude oil), down 8%; and agricultural products (9% of traffic), down 4%.Intermodal (47% of traffic) is down 3% YTD.
“Year-to-date, the Dow Js Transports Index is now lagging the S&P500 by 0.5% after leading the index by about 2% after 1Q16.”
Download attachments: Chainalytics-Cowen Freight Indices