According to two third-quarter 2020 surveys conducted by Cowen and Company analysts Jason Seidl, Matt Elkott and Adam Kramer, freight car order expectations by the shipper sub-group of railcar buyers have risen, “reflecting a net incremental positive for demand”; and rail shippers expect rail price increases of 3.1%, up 80bps sequentially, as “economic expectations increased sequentially and many are now in line with the survey’s averages, if not higher.”
3Q2020 RAIL EQUIPMENT SURVEY
“Order expectations by the shipper sub-group of railcar buyers have risen. This is true for total shippers surveyed and same shippers surveyed, reflecting a net incremental positive for demand. Among railcar suppliers, we favor TRN for the flexibility of its manufacturing/leasing model. We also favor GBX for its international diversification and cost cutting but are cautious into the print.
“When it comes to order activity we consider four key metrics: (1) The percentage of “all participating shippers” who will or may order railcars. (2) The conviction level about ordering (the split between “yes” and “maybe”) within this “all participating shippers” group. (3) The percentage of “same shippers” who will or may order railcars. (4) The conviction level about ordering (the split between “yes” and “maybe”) within this “same shippers” group.
“In our 1Q20 survey, all four metrics deteriorated. In our 2Q20 survey, the first and third metrics deteriorated, while the second and fourth improved somewhat. And now in our 3Q20 survey, the first and third metrics improved, the second remained unchanged, while the fourth deteriorated. Another sequential improvement is that order sizes increased.
“Roughly 49% of all shippers surveyed said they will or may order railcars in the next 12 months. This compares to 40% in our 2Q20 and 47% in our 1Q20 survey, and is the highest result thus far this year. About 51% now say they do not plan to order railcars, compared to 60% in our 2Q20 survey and 54% in our 1Q20 survey. Within the 49% of total shippers who are contemplating orders in the next 12 months, 57% said “yes,” they plan to place orders, in line with 2Q20, while 43% said “maybe,” also in line with 2Q20 (Figure 2).
“On a same-shipper basis, about 45% of same shippers in 3Q20 said they will or may order railcars, compared to 37% in 2Q20. Roughly 55% do not plan to order railcars, compared to 62% in 2Q20. Within the 45% of same shippers who are contemplating orders in the next 12 months, 53% said “yes,” they plan to place orders (62% in 2Q20), while 47% said “maybe” (38% in 2Q20). The results of this question are a slight incremental negative for railcar demand over the next 12 months.”
3Q20 RAIL SHIPPER SURVEY
“Shippers anticipate rail prices to increase by 3.1% over the next 6-12 months, another healthy step up from 2.3% in last quarter’s survey and only 1.9% in 1Q. The 3.1% result is above rail cost inflation, (slightly) above the survey’s the five-year average of 3.0% but still below the survey’s long-term ten-year average of 3.6%.
“Business growth expectations improved 180bps sequentially, the survey’s highest response since 1Q19. The percentage of shippers expecting their employee counts to increase over the next 12 months increased 1,400bps from last quarter’s response, with only 10% of shippers expecting their employee count to decrease. Similarly, 56% of shippers answered that they are more confident in the direction of the economy today than they were three months ago, the survey’s highest response since 3Q18 and above the survey’s 47% average.
“Finally, business levels over the past few months were “positive” for ~60% of respondents, up from only 32% last quarter and in line with the survey’s average. In 3Q, KCS received the highest “positive” rating, followed by BNSF. The average “positive” rating of Class I rail service increased sequentially to 57% from 55% in 2Q, with KCS improving the most and CNI, Ferromex, and UNP receiving worse ratings. The average y/y increase in “positive” ratings in 3Q20 vs. 3Q19 was 440bps, compared to a 700bps decrease n 2Q20. KCS improved the most y/y, followed by CP, BNSF, and Ferromex. CNI declined the most y/y.
“3Q20 ratings for the railroads were 470bps better, on average, then the five-year average rating, with only CNI coming in worse than its five-year average. CSX’s rating was the highest relative to its five-year average, with BNSF and CP also improving by more than 500bps. KCSM again received a better rating than its Mexican peer Ferromex.
“51% of shippers who answered our 3Q survey indicated that their business is back to running at pre-COVID-19 levels, while 49% answered that it isn’t. This answer was surprising and a negative sign regarding the individual businesses of the survey’s diverse shipper base. Among shippers whose businesses are still running below pre-COVID-19 levels, the largest percentage of shippers answered that their businesses are only 6-10% below pre-COVID levels; however, 18% answered that their business is 26%+ below pre-COVID levels.
“We believe that Outperform-rated NSC and UNP, as well as Market Perform-rated CSX, have the best chances to beat Street estimates. Per multiple Wall Street Journal reports over the summer, KSU was approached regarding a buyout by PE. We still favor the stock, with our fundamental thesis regarding PSR and revenue growth from supply chain shifts intact, and now augmented by takeout potential.”