Indications are that the lean market for new railcars reached bottom in the first quarter and that orders should start to cycle ahead in the current quarter, according to a note to investors by Cowen & Co.
“Rail equipment earnings boosted our confidence that railcar demand has likely bottomed and should begin to recover,” say Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl and Vice President Equity Research Matt Elkott.
Orders in the first quarter were largely unchanged from fourth quarter 2016, but they cited recent orders and inquiries with builders that could fuel modest gains. “Our views about a recovery in small cube covered hoppers and increased interest in lease fleets should continue to play out,” say Seidl and Elkott, which bodes well for builders American Railcar Industries, Greenbrier Cos., and Trinity Industries.
Orders for new cars in the second quarter “could exceed those in the first quarter (just over 4,800 units) modestly. This would follow a 1% sequential decline in 1Q, a 12% sequential decline in 4Q16 and a 27% sequential decline in 3Q16.” They based this on improved first-quarter results and commentaries by builders and lessors; carload growth, and their own review of industry contacts.
One caveat: Trinity is awaiting a ruling on its appeal of a $663 million judgment that it manufactured defective highway guardrails. “If the ruling is favorable for TRN, we think the shares could rise materially. If the ruling is unfavorable, the shares could pull back somewhat, potentially spurring opportunistic buying,” Seidl and Elkott say.
Seidl noted rail traffic is up 6.7% from the year-ago quarter and 4.9% year-to-date. “Traffic in the last four weeks is up 1% sequentially from the prior four weeks. We believe the rail recovery is sustainable due to improved demand and the upcoming trucking industry ELD [electronic logging device] regulations, which, along with lean fleet sizes, should reduce truckload capacity by 3-5% in 2018. At the same time, rail velocity has decreased. These trends bode well for rail equipment demand. Our proprietary railcar industry backlog forecast is under review.”
The anaylsts said Freightcar America may have received as many as 1,000 orders after the first quarter, compared to 68 units in the first quarter of 2017; net orders totaled 10 units in 4Q16.
“(FCA), which has roughly 6% of the industry backlog, raised its 2017 delivery guidance to 4,200-4,400 units, up from the prior guidance of 3,200-3,800,” they say. “This was in some part based on orders the company received thus far in 2Q.” They revised FCA full-year 2017 and 2018 estimates from losses of $.47 and $.04 to earnings of $0.03 and $0.03.
They also pointed to Trinity’s 1Q earnings call in which the company noted a recent uptick in inquiries. The builder, which has roughly 44% of the industry order backlog, expects 2017 railcar deliveries “in the 15,000-16,000 range, up from 14,000 to 15,000 provided on the 4Q16 earnings call. Demand for frac sand equipment has improved materially, spurring some customers to pull forward delivery dates. If the frac sand recovery continues we could start to see orders for new small cube covered hoppers with the [builders].”
The analysts earlier in the year noted a recovery in frac sand hoppers, and industry observers told Railway Age that, as drilling technology and techniques improve, the petroleum industry is using more sand per well, as much as 3,000 pounds per linear foot, up from 1,500 pounds. That has translated into increased demand for sand, cars, and operation of longer trains.
“Greenbrier, which has roughly 33% of the industry backlog, received orders for just 700 railcars in its fiscal 2Q17 quarter, which ended Feb. 28,” according to Seidl and Elkott. “GBX received additional orders for 1,000 railcars from March 1 through April 4.
American Railcar Industries received orders for 874 new railcars in 1Q17, they say, up from 40 units in 4Q16. “The company has also received orders thus far in 2Q17, and the level of inquiries continues to be elevated from the low levels seen for much of 2016.”
They noted increasing interest in lease fleets by international investors, including the announcement by Greenbrier in early April of an agreement with Mitsubishi UFJ Lease & Finance (MUL) of Japan. The companies agreed “to substantially expand their existing commercial relationship in North America, and MUL intends to expand its portfolio from 5,000 to a total of 25,000 railcars over the next four years,” including a multi-year purchase commitment for 6,000 new railcars from Greenbrier through 2020, and to obtain all its newly-manufactured railcars exclusively from Greenbrier through 2023. The value of the deal exceeds $1 billion.
Explore the Challenges, Issues, and Trends Affecting the North American Rail Market. REGISTER NOW for Railway Age's 3rd Annual RAIL INSIGHTS June 7 & 8, 2017, Chicago.