Cowen: Railcars “robust,” locos “rebounding”

Written by William C. Vantuono, Editor-in-Chief
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National Steel Car photo.

Inquiries and orders for new railcars remain robust, with strength in tank cars, intermodal equipment, box cars and steel gondolas, and the locomotive new-build market appears set for a gradual rebound, report Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, and Cowen Vice President Matt Elkott from the firm’s annual Transportation Conference. “This reinforces our confidence in our 3Q18 forecast of 20,500 units in industry orders,” they said. CBR (crude by rail) could enjoy relative strength through 2022. We continue to favor Wabtec, Trinity, Greenbrier, and ARI.”

Excerpts:

  • “Two railcar builders indicated that demand remains strong. Inquiries and orders for newly built railcars do not appear to have subsided from the strong levels seen in 2Q18 on an organic basis. We believe that, excluding the 4,800 tank cars ordered by GATX from Trinity and the roughly 6,000 grain cars ordered by the CN and Canadian Pacific from [National Steel Car] in the second quarter and 7,650 railcars ordered by GATX from ARI in the third quarter, 3Q18 organic orders should be largely in line with 2Q18 orders. Including the three aforementioned deals, 3Q18 orders should come in at about 20,500 units, compared to 23,800 units in 2Q18, according to our forecast.”
  • “Railcar lease rates should experience another modest sequential quarterly increase in 3Q18. It appears one of the biggest improvements has occurred in tank cars. The DOT117J (new) tank cars for CBR service are in high demand due to rising CBR shipments and concern that the railroads may be imposing penalties on the use of the retrofitted variety, the DOT117R, or disallowing its use altogether. Only about 1,700 DOT117Js have been added to the North American fleet thus far this year, nowhere near enough to accommodate the expected growth in CBR over the next few years if retrofitting stops being an option. In addition to favorable oil price and differential trends, the recent nixing of the Trans Mountain pipeline could further drive CBR growth and mean that the relative strength could last through 2022, as opposed to the 2019 timeframe that had previously been the near-consensus.”
  • “Our 2018 and 2019 railcar industry production estimates of about 53,000 units and 56,000 units continue to be among the highest we’ve seen, but still not far off the 2005-2017 average of roughly 55,000 units. We believe some of the second quarter’s orders are for delivery late this year. Additionally, some customers may attempt to pull forward delivery dates on existing orders due to improving freight demand and out of concern about potential manufacturing capacity issues if the current strength continues or intensifies. As production levels improve, so should the builders’ margins, as incremental units produced should lead to operating leverage. As such, we expect solid 3Q18 earnings results and further improvement in the ensuing quarters as production levels rise, driven partly by strong orders YTD.”
  • “On the demand front, we are modeling for industry orders of roughly 69,100 units and 51,700 units in 2018 and 2019, respectively. Our 2018 estimate includes GATX’s orders of 4,800 units and 7,650 units from Trinity and ARI, respectively. It also includes roughly 6,000 grain cars ordered by the Canadian railroads on the heels of the passage of Bill C49 in Canada. Excluding these three sets of orders this year, our 2019 estimate for the industry represents 2% growth, a continuation of solid demand. Industry orders have averaged about 58,000 units per year in the aforementioned 2005-2017 period. This includes a meager 9,000 units in 2009, the year of the Great Recession, and a record 140,000 units in 2014, at the height of the CBR expansion.”
  • “The locomotive new-build market appears set for a gradual rebound. One example of this recovery is CN’s recent announcement that it will acquire 60 additional locomotives from GE Transportation, boosting the railroad’s 200-unit order placed late last year. The locomotive rebuild market should continue to show strength.”
  • “North American Class I traffic is up 4.7% QTD as of Sept. 1, compared to the 3.6% YTD growth. Meanwhile, although rail service has seen improvement from late 2017/early 2018 levels, a degree of congestion has persisted beyond most expectations. As we face peak season and the possibility of weather events later in the year, rail service may not make the type of improvement the railroads may have hoped for earlier this year. This would likely further drive equipment demand.”

Categories: Class I, Finance/Leasing, Freight, Freight Cars, Intermodal, Locomotives, Mechanical, News, Short Lines & Regionals, Switching & Terminal Tags: ,