Cowen and Company surveys “generally positive”

Parallel first-quarter 2018 surveys conducted by Cowen and Company with rail shippers, and with shippers who own or lease railcars, indicate that the market is “generally positive” for railroads and railcar manufacturers.

Cowen Managing Director and Railway Age Wall Street Contributing Editor facilitated the shipper survey. His colleague, analyst Matt Elkott, conducted the railcar survey.

1Q18 RAIL SHIPPER SURVEY

“The read-throughs from our survey are generally positive for the railroads,” Seidl noted. “Shippers are anticipating price increases of 3.8% over the next 6-12 months, up from 3.5% in our 4Q17 survey. Market share is moving from the highway to the railroads. Recent U.S. tariff actions on trade in steel and Chinese imports are expected to have a positive impact by only 7% of respondents.”

The average base rate increase of 3.8% over the next 6-12 marks the fourth consecutive quarterly increase in shipper expectations. “This is one reason we think the railroads are well positioned to continue raising prices, especially given the conditions in the trucking market,” Seidl said.

Norfolk Southern saw the largest decline in favorable service reviews from customers, “which is not surprising given their recent service issues,” Seidl pointed out. “Shippers still do not view CSX’s service levels favorably, as only 33% consider it “good” or “excellent” compared to an average of 55% for the rest of the Class I’s. Once again, BNSF collected the most positive reviews of the group.”

Despite rising Class I and IMC (intermodal marketing company) prices, the rail discount has widened in recently due to truckload prices that remain elevated, and trucking capacity shortages. However, shippers are appear to be increasingly concerned about highway and rail capacity, the latter due to 2017 headcount reductions.

The Trump Administration’s proposed tariffs on imported steel and Chinese imports has created some worry among rail shippers, as 29% expect the reactions to be negative for their businesses, and only 7% believe it will help them. More than 30% of shippers surveyed were unsure of the impact, while nearly 30% felt it would be neutral.

“Overall, we view the results of this survey as positive for the railroads,” said Seidl. “The 3.8% price increase expectation leaves additional breathing room from the all-important 2% rate, which is important because rail-cost inflation typically hovers in that area, and pricing will need to remain above that level in order for the railroads to improve their operating ratios. The 3.8% is also the first time in almost three years that we’ve seen a result above the long-term survey average of 3.7%.”

1Q18 RAIL EQUIPMENT SURVEY

The results of this survey “affirm our favorable view of railcar demand,” said Matt Elkott. “The percentage of shippers contemplating equipment orders increased materially, and order sizes ticked up. We continue to favor Wabtec, Greenbrier, Trinity and ARI.”

There is a “net positive” for new railcar demand in the next 12 months, with order activity based on the percentage of shippers who will or may order railcars, and how committed they are to those orders.

“Shippers said they expect to place larger orders, relative to our prior (4Q17) survey,” Elkott noted. “Among those who said they don’t plan to order railcars in the next 12 months, the percentage who said it’s because they don’t have incremental equipment needs decreased.”

Roughly 54% of respondents said they “will” or “may” order railcars in the next 12 months—up from 39% in Cowen’s 4Q17 survey—with a little more than half of this group providing a firm “yes.” The 46% who say they do not plan to order railcars is down from 61% in the prior-quarter survey. “This points to a somewhat decreased level of certainty about ordering relative to 4Q17,” Elkott said.