KeyBanc Capital Markets analyst Steve Barger attended the Midwest Association of Rail Shippers (MARS) conference and came away “believing our bullish thesis on the railcar space is correct.”
Barger said the conference tone “was generally optimistic,” with discussions revolving around the impact of emerging technology and the implementation of PSR (Precision Scheduled Railroading). Barger predicts “modest impact from these initiatives to our bullish view on railcar OEMs in the near-term. Long-term, we see potential for a more meaningful impact if successfully implemented.”
Some railcar suppliers noted that elevated backlog visibility and expectations for additional industry orders “provide some confidence through the first half of the year,” Barger noted. “A few participants expressed a more cautious view around long-term commitment,s given ongoing trade discussions, the government shutdown,, and other political issues.”
With regard to the emerging technology, “we heard about multiple use cases for artificial intelligence, machine learning, and blockchain technologies to increase transparency, efficiency and accountability of shipped products and rail assets,” Barger said. “Regarding the latter, there were mixed opinions on the merits and near-term, impacts of PSR, though most participants viewed the system as having long-term potential to improve asset efficiencies and returns.”
Railroads and shippers “are increasingly embracing the idea and use of technology to improve asset efficiency and returns,” Barger noted. “As the implementation of PTC has become substantially complete across the Class I fleet, there has been some shift in thinking from ‘the unfunded mandate’ to ‘the backbone of the digital railroad.’” Some presenters discuss a shift toward a moving-block train control (so-called “PTC 2.0”), which would enable tighter headways and, at least theoretically, increase network capacity. Additionally, autonomous trains are “inevitable and necessary to offset share loss stemming from heavy investments in autonomous trucking. We think this is a long-term issue, given technical, regulatory and cultural issues that will need to be addressed.”
Opinions on PSR’s near-term impact were mixed, “though most participants agreed on the long-term opportunities for improved asset efficiencies,” Barger said. “While definitions of PSR vary, the underlying model focuses on improving customer service, efficiency and asset utilization. The process of achieving those goals is widely debated among constituents. While some railroaders look forward to more precise scheduling of fewer, longer trains, shippers fear load rationalizations and loss of flexibility, which could make it harder to respond to swings in demand, such as the crude-by-rail spike in 2012-2014.”
The near-term focus on improving asset utilization and financial returns via PSR and advanced technology “could have a modest impact on equipment orders, though we don’t expect a major structural change this cycle,” Barger concluded. “Long-term, it will be harder to predict how the increased use of technology will reduce equipment requirements, particularly if population growth fuels higher volume to offset equipment rationalization. As such, we remain bullish on continued cycle improvement for railcar OEMs driven by improving pricing, stabilizing lease rates and avenues for improved capital deployment supported by substantial liquidity” for Trinity and Greenbrier, which KeyBanc rates as Overweight.