Rail shippers in fourth-quarter 2020 expected price increases of 3.2% (up 10bps sequentially), and their sub-group of railcar buyers raised order expectations modestly, according to two surveys conducted by Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper.
Following are the analysts’ key takeaways from the Rail Shipper Survey and Rail Equipment Survey.
4Q20 Rail Shipper Survey Results
• Pricing expectations. The anticipated rail price increase of 3.2% over the next six to 12 months is up slightly from the 3.1% noted in the third-quarter survey and “well above” the 2.3% noted in the second-quarter survey. “The 3.2% result is above rail cost inflation, slightly above the survey’s the five-year average of 3.1% and modestly below the survey’s long-term ten-year average of 3.6%,” the analysts reported.
• Economic results: “A mixed bag.” The survey found that “business growth expectations fell 30bps sequentially, although still up from 1H20 lows. The percentage of shippers expecting their employee counts to increase over the next 12 months declined 100bps from last quarter’s response, relatively unchanged compared to last quarter’s large uptick. 62% of shippers answered that they are more confident in the direction of the economy today than they were three months ago, up from 56% last quarter and the survey’s 48% average. Finally, business levels over the past few months were ‘positive’ for 63% of respondents, up from 60% last quarter.”
• Rail service. The analysts reported that Kansas City Southern (KCS) “again” received the highest “positive” rating, followed by BNSF (BNI). “The average ‘positive’ rating of Class I rail service decreased sequentially to 53% from 57% in 3Q, with CNI [CN] being the only railroad to see a sequential increase,” they noted. “The average y/y decrease in ‘positive’ ratings in 4Q20 vs. 4Q19 was 700bps, compared to a 400bp increase in 3Q20. CNI increased the most, after being the biggest decliner in our 3Q survey. 4Q20 ratings for the railroads were 400bps worse, on average, then the five-year average rating. Apart from CNI, all other railroads declined in ‘positive’ service ratings in 4Q. KCSM again received a better rating than its Mexican peer Ferromex.”
• Shipper business recovery. According to the analysts, 55% of shippers indicated that their business is “back to running at pre-COVID-19 levels, while 45% answered that it isn’t. This is a sequential improvement compared to 3Q, where 51% of shippers indicated business is back to pre-COVID-19 levels. Among shippers whose businesses are still running below pre-COVID-19 levels, the largest percentage of shippers answered that their businesses are only 1%-5% below pre-COVID levels; however, 13% answered that their business is 26%+ below pre-COVID levels. Taken as a whole, we see this as a slight positive as shippers have been able to navigate through the ever-changing macro-environment.”
• Rail stock insights. The analysts have updated their 4Q rail models to reflect carloads, “causing us to take down 4Q numbers slightly (except for CSX which increased $0.01). We highlight Outperform-rated CNI and UNP [Union Pacific] as having the most upside to our price target among our rail universe.”
4Q20 Rail Equipment Survey Results (shipper sub-group of railcar buyers)
• Metrics. The analysts considered four key metrics for order activity: “(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 the 1Q20 survey, “all four metrics deteriorated”; 2Q20 survey, “the first and third metrics deteriorated, while the second and fourth improved somewhat“; 3Q20 survey, “the first and third metrics improved, the second remained unchanged, and the fourth deteriorated.” For the 4Q20 survey, “the first, third, and fourth metrics improved, while the second deteriorated,” the analysts said.
• Order planning, total shippers. The analysts reported that “51% of all shippers surveyed said they will or may order railcars in the next 12 months. This compares to 49% in our 3Q20 and 40% in our 2Q20 survey, and is the highest result of 2020. Within the 51% of total shippers who are contemplating orders in the next 12 months, 54% said ‘yes,’ they plan to place orders, versus 57% in 3Q20; while 46% said ‘maybe,’ compared with 43% in 3Q20. This points to a slight decrease in the level of certainty. We believe this could be more a function of pandemic and political uncertainty than a reflection of underlying demand conditions.”
• Order planning, same shippers. “On a same-shipper basis, about 48% of same shippers in 4Q20 said they will or may order railcars, compared to 45% in 3Q20 and 37% in 2Q20,” the analysts said. “Within the 48% of same shippers who are contemplating orders in the next 12 months, 56% said ‘yes,’ they plan to place orders (53% in 3Q20), while 44% said ‘maybe’ (47% in 3Q20). The results of this question are an incremental positive for railcar demand over the next 12 months.” (See chart below.)
• Revising estimates, The Greenbrier Companies (GBX). “We are revising our FY21 and FY22 GBX EPS estimates to $0.34 and $2.99, from $1.62 and $3.41, respectively, in order to reflect the company’s fiscal 1Q21 results and adjusted production cadence, among other things,” the analysts reported. “Our unchanged $41 price target is based on our unchanged CY22 EPS estimate of $3.18 and the same 13x multiple.”