Tuesday, January 19, 2010

Dahlman Rose looks beyond 2010

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Freight rail pricing is expected to strengthen gradually this year, staying ahead of cost inflation, as the economy recovers, according to revised predictions issued this morning by Dahlman Rose & Co.

jason-seidl-web.jpg“While we admit to looking at the glass half full for the railroad industry in 2010, we are modestly trimming some of our 4Q09 and 2010 estimates as we look ahead to 2011,” said Dahlman Rose Director Equity Research and Railway Age Contributing Editor Jason Seidl. “ Although rail volumes have made a notable recovery in the second half of 2009 from the historically low levels seen earlier that year, the improvement was largely attributable to the easiest year-over-year comparisons in decades. Demand for many commodities has strengthened as of late, and further improvement in market fundamentals likely lies ahead. However, such improvement will occur slowly and gradually in 2010 and rail traffic growth may fall short of some investors’ expectations.”

Though 2010 pricing will fall short of the numbers recorded in 2008 and 2009, the railroads “should be able to generate pricing levels above the level of cost inflation,” said Seidl (see Railway Age’s story from January 18). “Indeed, respondents to our proprietary Dahlman Rose 4Q 2009 Railroad Shipper Survey noted that they expected rail pricing to grow 3.8% over the next 6-12 months. Looking into 2011, we might see rail pricing strengthen given that current truckload rates are likely unsustainable over the long run. This should raise the price ceiling on truck competitive traffic for the railroads.”

2010 is “unlikely to be the banner year needed to erase memories of the late 2008/early 2009 nightmare,” Seidl concluded. “We believe investors will start to value the companies on earnings generated in 2011 or beyond. Accordingly, we have initiated EPS estimates for 2011 to go along with our revisions for 2009 and 2010. We have also chosen to value the stocks on 2011 numbers, which has led to the price target of our four Buy rated railroad stocks.” Those price targets are US$58 for CN (exchange rate assumption of $0.95 US/Canadian), $51 for CSX, $56 for Norfolk Southern, and $68 for Union Pacific—an average increase of 6%.