Monday, October 02, 2017

NEARS Cowen surveys mostly favorable for rail

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Two shipper surveys, one on railcars, the other on rail service, conducted by Cowen and Company at the Sept. 26-28 Northeast Association of Rail Shippers (NEARS) 2017 annual conference indicated mostly favorable results for the industry.



According to Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, and Vice President Surface Transportation Equity Research Matt Elkott, the survey results are “a net incremental positive” for railcar demand. About 35% of shippers said their railcars needs “increased modestly” during 3Q17. About 41% said they are more likely to buy or lease additional railcars than in 2Q17. “We view this is as a net positive for railcar demand,” the Cowen analysts said.

Almost 60% of shippers said their railcar needs did not change in 3Q17. About 3% said their needs “increased significantly,” and another 3% said their need “decreased modestly.” None said their need decreased significantly. “We believe this is a meaningful net increase in the need for railcars over the past three months,” Seidl and Elkott said.

Most shippers (61%) believe fewer than 1,000 railcars will have to be replaced as a result of sustaining hurricane/flood damage. About 28% believe the number is 1,000-5,000 railcars. Shippers who believe the number is greater than 5,000 railcars represented 11% of survey respondents.

More than half of respondents (54%) expected their 2018 carloads to increase from 2017. Specifically, 36% expected 2018 growth to be less than 5%; 15% said it will range from 5% to 10%; and 3% said growth will exceed 2017 levels by more than 10%. About 12% anticipated their 2018 carloadings to be down from this year; roughly 33% expected their carloadings to be flat.

“Shippers appear to be concerned about the availability of trucking capacity,” Seidl and Elkott said. About 57% are “somewhat concerned”; 23% are “very concerned.” Only 20% believe that 2018 trucking capacity will be adequate despite storm recovery and rebuilding efforts and upcoming ELD (Electronic Logging Device) implementation.

“While these dynamics could drive demand for intermodal flats, post-storm rebuilding and a potential infrastructure bill down the road could aid demand for other flat cars,” Seidl and Elkott noted. “Another potential dynamic is eventual demand for autoracks as the replacement of one to two million flood-damaged automobiles begins to take place. Overall we view the survey results as a net incremental positive for the railcar sector. We continue to favor Greenbrier, ARI, and Trinity. Our Trinity price target is under review.”

Survey respondents said CSX’s service challenges “may be beginning to ease,” though Norfolk Southern “has likely taken some market share,” said Seidl and Elkott. “There is a silver lining for CSX based on the results of our survey.” While 97% described CSX’s current service quality as fair to poor, 63% said service is improving. Roughly 20% said CSX service is poor and getting worse.

More than half of survey respondents (53%) said they changed rail carriers or transportation modes as a result of CSX’s service levels. “It remains to be seen how much of this shift may be temporary, but our channel checks suggest that, at least regarding freight that went to NS, CSX’s [main] competitor was fairly selective and, in some cases, demanded longer-term commitments from customers,” Seidl and Elkott said. “Overall, we view the results of this survey as a net incremental positive for the railroads, especially NS, [which, with] Genesee & Wyoming, continues to be our favorite railroad.”

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