Friday, July 14, 2017

Survey results a positive for railroads: Cowen and Co.

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Jason Seidl Jason Seidl

According to Cowen and Company’s Second-Quarter 2017 Rail Shipper Survey, respondents are anticipating price increases of 3.0% over the next 6-12 months, up 40 basis points from 2.6% in Cowen’s 1Q17 survey and the highest level since 4Q15.

A 3% increase “is higher than the 2.2% investors are expecting, based on our recent investor sentiment, and this could provide upside for rail stocks,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. As well, shippers are seeing more favorable businesses trends, but nearly 90% of those responding to the survey “have not invested in anticipation of a federal infrastructure bill that the Trump Administration hopes to pass.”

Cowen’s survey results suggest that the pricing gap between truckload railroad rates narrowed in 2Q17. “A higher percentage of intermodal-eligible shippers said there was a 0% to 5% rail discount than in our prior survey,” Seidl notes. “A lower percentage said the discount was as large as 5% to 10%.”

Higher rail rates could lead to some margin pressure for IMCs (intermodal marketing companies) like Hub Group and J.B. Hunt during the next few months, but IMCs may have also started to raise rates.

As to rail service quality, 24% of survey respondents rated CSX’s service as “poor,” compared to all the other Class I’s, none of which received a “poor” rating from more than 6% of respondents. However, “we suspect this view of CSX is related to a reduction in the number of offerings rather than the poor quality of service, given the company’s solid productivity metrics,” Seidl says. “In 2Q17, CSX’s dwell time was down 3%, train speed was up 2%, and cars on line were flat while carloads were up 1%. If that’s the case, it would bode well for earnings.”

More than half of respondents said they expect their employee headcount to be higher in 12 months, up from the high 30% range in 2016. This indicates that business trends are improving.

“Overall, we view the results of this survey as positive for the railroads,” Seidl says. “The 3.0% 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 approximately 3% over the next 6-12 months, we think there could be incremental upside for railroad stocks given investor expectations are in the low- to mid-2% range for both 2017 and 2018.”

2Q17 Rail Shipper Survey Cowen and Company 4

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