Tuesday, October 17, 2017

Cowen survey: Shippers expecting rate increases; still unhappy with CSX

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Cowen and Company Managing Director and Railway Age Wall Street Cowen and Company Managing Director and Railway Age Wall Street

Railroad shippers are anticipating price increases averaging 3.2% over the next 6-12 months, according to Cowen and Company’s Third-Quarter 2017 Rail Shipper Survey. This is a 20 basis point sequential increase from 3.0% in Cowen’s 2Q17 survey.

“That’s higher than investors are expecting and could provide upside for rail stocks,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Business outlooks are more bullish.”

Fifty-eight percent of shippers responding to the survey called CSX service “poor,” and nearly 50% of those who shifted freight from CSX to Norfolk Southern say that NS rates are the same or less expensive.

The expected 3.2% rate increase is higher than the 2.7% investors are expecting in 2018, based on Cowen’s recent sentiment survey. J.B. Hunt’s recent letter to customers indicating potentially sizable rate increases probably “raised shipper expectations ahead of this survey,” Seidl said. As to CSX drawing a 58% negative service quality rating, “no other railroad received a ‘poor’ rating from more than 8% of shippers,” he noted. “That’s worse than the 24% of respondents that gave CSX the same rating in our 2Q17 survey.”

Survey respondents said that their business trends are improving, based on 12-month growth expectations rising to 3.2% from 3.0% in the prior survey. “However, fewer respondents are as confident in the economy today as they were three months ago,” Seidl noted.

Of the 40%-plus shippers who shifted freight from CSX to NS beginning in March 2017, about half cited NS rates as lower. “We would have expected to see more respondents indicate that NS was charging them a premium,” Seidl said. “Fewer respondents noted that trucking is a cheaper option for them relative to 2Q17’s survey. That’s consistent with the strength of the spot truckload market in recent months.” What could all this means for railroad stocks? “Overall, we view the results of this survey as positive for the railroads,” Seidl said. “The 3.2% price increase expectation leaves additional breathing room from the all-important 2% rate, which is important because rail cost inflation typically hovers in that area, and pricing will need to remain above that level in order for the railroads to improve their operating ratios.”

If shippers are correct and railroad pricing increases an roughly 3% over the next 6-12 months, “we think there could be incremental upside for railroad stocks given investor expectations are below that level for both 2017 and 2018,” Seidl noted. “Investors are looking for 2.2% and 2.7%, respectively. Shippers’ business trends are also generally improving. We continue to prefer NS and Genesee & Wyoming as our top rail picks.”

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