Monday, June 22, 2009

Morgan Stanley: Auto forecast bolsters freight rail outlook

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Freight railroads could benefit from what Morgan Stanley analysts William Greene and Adam Longson describe as “a large increase in North American auto production” during the third quarter. Citing the latest Wards North American auto production forecast, Greene and Longson “estimate that the likely increase in [railroad] auto volumes could add up to 2.0% and 1.0%-to-3.5% to our EPS [earnings per share] estimates for the railroads in 2009 and 2010, respectively.”

“Among freight carriers, railroads are the laggards in the group, and we've been hesitant to build in a large volume rebound given economic headwinds.  However, if the latest auto production forecasts are correct,we will need to bring forward our auto recovery and raise our auto volumeforecast materially,” Morgan Stanley said, adding, “While not a game changer for EPS, it could have a large impact on sentiment.”

The analysis particularly noted improved prospects for Norfolk Southern, due to its “large Ford exposure,” and Union Pacific, through its “large auto franchise.”

Beyond specific companies, Morgan Stanley stated, “While the auto production forecast may not be a significant catalyst by itself, we think analyzing auto carloads alone understates the significance.  A number of commodities, namely steel and chemicals, have a large automotive component. Steel inventories are already low and our steel analyst expects U.S. production to increase in [the second half of 2009] on greater demand, particularly in the automotive sector.”