Railcars a “steel” as tariff looms?

Written by William C. Vantuono, Editor-in-Chief
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Cowen and Company Equity Research Analyst Matt Elkott. William C,. Vantuono photo.

Cowen and Company analysts Matt Elkott and Matthew Frankel are projecting a 20% sequential jump in freight car orders in the first quarter to 10,200 units (up 20% from the fourth quarter’s 8,500 units), since “buyers may preempt an acceleration in the steel price rally.”

Beyond the first quarter, President Trump’s proposed tariffs on imported steel and aluminum “could act as a minor headwind to builders and a tailwind for lessors in the intermediate term” as continued strength in order activity seems apparent, Elkott and Frankel note. “Sentiment at the Rail Equipment Finance 2018 conference was in line with or slightly better than 2017, which was markedly better than 2016.”

All else equal, a major uptick in new-car orders “could be a near-term catalyst for railcar stocks,” the analysts say. “Looking past 1Q18, we estimate that a hypothetical 25% increase in the total steel component cost of a railcar would be passed through by builders as a roughly 12% price increase to customers acquiring new tank cars or hoppers. Absent a concurrent improvement in underlying freight fundamentals, the new-build market would have to regain equilibrium via lower orders, manufacturer margin concessions elsewhere that would limit the price increase, or any combination of the two. These headwinds should be partly offset by elevated scrap metal prices making equipment retirement and replacement more compelling.”

Elkott, Frankel and Cowen colleague Jeff Osborne participated in REF 2018. “Sentiment was largely in line or slightly better than last year, which in turn was a more pronounced positive inflection point,” they say. “Conference attendance was up modestly from 2017, suggesting continued interest in rail equipment assets, including from financial investors. We came away with our high level views of the industry largely reinforced: The ongoing modest railcar recovery is likely sustainable; rail service hiccups should contribute to recovery in the near term; and the risk of overbuilding has risen, something that should benefit manufacturers for the foreseeable future but could pose a longer-term threat to lessors.”

Categories: Class I, Finance/Leasing, Freight, Freight Cars, Mechanical, News Tags: , , ,