Cowen shipper survey: Price increases expected

Shippers expect a 2.9% price increase from the railroads over the next 6-12 months, according Cowen and Company’s Second-Quarter 2016 Rail Shipper Survey (downloadable from the link below).

. “That expectation has not changed from 1Q16,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “This breaks a streak of moderation that started in 1Q15 when shippers began to forecast a decline in the pace of rate increases. On the margin, that’s a positive for the railroads. However, shipper confidence levels have deteriorated and business conditions worsened from our most recent survey.”

An average base rate increase of 2.9% “is flat sequentially and 110 basis points (bps) below the prior-year rate,” said Seidl. “We don't view this breaking of the streak as overly significant just yet as a 2.9% price increase is still 100bps below the average shipper expectation of 3.9% since 1Q09. This is likely attributable to traffic weakness (2Q16 North American carloads were down 8.9% year over year), making shippers feel somewhat more empowered in contract negotiations. The trucking market is off its lows according to our July 12th private company conference call, which coincides with what intermodal shippers seem to be suggesting in this survey. Only 27% said their trucking options were cheaper than rail, which is down from 35% in our 1Q16 survey. That trend also jives with what we saw in our latest Chainalytics-Cowen Monthly Freight Demand Indices (also downloadable from the link below), as the spread between spot and contract rates have narrowed.”

“Business growth and headcount outlooks worsened compared to our prior survey,” Seidl noted. “Shipper confidence in their businesses fell. Of the nine business segments we designate, only Building Materials saw a positive inflection from the 1Q16 survey. Transportation companies actually saw the biggest decrease in growth expectations.”

The survey results “keep us cautious on the rail sector,” said Seidl. “Shippers’ business growth expectations fell, confidence eroded, and while price increases remained stable, they are still subdued. While ongoing cost management and share repurchases should help offset some of the traffic weakness through the rest of the year, investors are likely to react more to outlook commentaries than 2Q16 results. We’ve heard from Canadian Pacific, which on 6/21 said 2Q EPS would be about 20% less than the market was expecting. North American carloads fell 8.9% in 2Q16 led by weakness in coal, chemicals and intermodal, which were down 27%, 10% and 6%, respectively. There are some potential bright spots though. It’s important to note the sequential acceleration in coal shipments given the recent spike in natural gas prices. Union Pacific, due to its exposure to the Powder River Basin, is the railroad we think is best positioned to benefit. We also see potential for grain carloads to increase.”