Takeaways From Cowen’s Rail Equipment Conference Call

Wabtec illustration

“Railcar inquiries are largely in line with—if not slightly better than—the anemic levels seen two months ago. Translation into orders remains slow. Lease rates are still depressed, with no signs of improvement. Secondary market valuations appear to have eased. Locomotive upgrades could prove resilient. We’re constructive on Wabtec, Trinity and Greenbrier, but the latter two could see near-term pressure.”

Those are the key takeaways from a conference call with five industry experts who are immersed in rail, rail equipment and industrial markets, which was moderated by Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer.

“We came away with our favorable view of WAB reinforced,” the analysts noted. “We remain constructive on Trinity and Greenbrier, but the immediate-term outlook is challenged as manufacturing orders remain anemic, and lease rates are not showing signs of improvement in the foreseeable future.

“Relative to two months ago, when we held our previous rail equipment conference call, railcar manufacturing inquiries are steady and may have even ticked up slightly. Translation into orders, however, remains slow, hampered by anemic underlying demand and an unprecedented kind of macro uncertainty. The inquiries appear to center around box cars, gondolas and grain cars, among others. A large percentage of the inquiries could be for replacement demand, as opposed to growth. In the case of box cars, the homogenization of the industry fleet into a handful of varieties is likely to be a phenomenon that would unfold gradually over the next several years. Grain cars should see more age-related replacement when customers begin to regain confidence in the economy.

“We are already modeling for steep sequential order declines. For Trinity, we forecast a ~64% drop to 700 units in 2Q20; our Greenbrier model bakes in orders of 1,200 units in 3Q20, down from 8,500 units in the prior fiscal quarter; and we’re projecting just 10 units for RAIL in the second quarter, down from 300 units in 1Q20.

“Lease rates, also relative to two months ago when they were already depressed, do not appear to have shaken off the downward momentum. Given that this has been occurring for the better part of two years, however, we believe that a floor for spot rates may be in sight late this year or early next year, barring a return of extensive economic shutdowns.

“North America’s locomotive upgrade market, including conversions, should continue to perform well, as the new build market may see no meaningful activity for a couple of years (the international new build market is more favorable). For Wabtec, a locomotive modernization is roughly half the revenue of a new build, but at a much higher margin.”