Cowen: Shipper surveys say …

“Economic confidence and business growth expectations slipped from the prior survey, though rail service views improved.” — Cowen and Company Managing Director Jason Seidl. Photo courtesy CNBC.

Two 2Q19 surveys of rail shippers on pricing/service quality and equipment needs conducted by Cowen and Company analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer indicate that, compared to 1Q19, Class I railroad customers are anticipating somewhat lower rate increases, and little change in demand for new railcars.

Rail shippers are anticipating an average price increase of 3.0% over the next 6-12 months, down from 3.4% in 1Q19 and below the long-term 10-year average of 3.7%, according to Cowen’s second-quarter 2019 Rail Shipper Survey. “Economic confidence and business growth expectations slipped from the prior survey, though rail service views improved,” the survey said. “We view these results as mixed to negative for the rails, though we would continue to be buyers of top-pick Norfolk Southern on any pullback.”

On a same-shipper basis, shippers anticipate a 50 bps price decrease, from 3.6% in 1Q to 3.1% this quarter: “While declining pricing expectations are inherently negative for the rails, we note that the survey’s current expectations remain above long-term rail cost inflation.”

The survey also noted that only 38% of shippers answered that they are concerned with rail capacity, down significantly from 57% in the 1Q19 survey, and the fifth consecutive quarter of fewer shippers answering in such a manner. Cowen said it believes “that is reflective of lower demand, as seen in rail volumes.”

On that note, Cowen’s proprietary 2Q19 Rail Equipment Survey does not point to further moderation in railcar demand. Instead, the company said, they are largely in line with—to slightly better than—the 1Q19 survey: “We are positive on Wabtec and largely neutral on Trinity and GATX.”

“When it comes to order activity we consider four key metrics: (1) The percentage of ‘all participating shippers’ who will or may order railcars,” the survey said. “(2) The conviction level about ordering (the split between ‘yes’ and ‘maybe’) among 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’) among this ‘same shippers’ group.

“The first, second and fourth metrics improved somewhat in 2Q19, while the third metric deteriorated only slightly. Order size results were mixed. Among the shippers who said they don’t plan to order railcars in the next 12 months, the percentage who said it is because they don’t have incremental equipment needs increased.”

Other key takeaways from the two surveys:

• Roughly 49% of all shippers surveyed said they will or may order railcars in the next 12 months. This compares to 48% in the 1Q19 survey. About 50% now say they do not plan to order railcars, compared to 51% in the prior-quarter survey. Within the 49% of total shippers who are contemplating orders in the next 12 months, 67% said “yes,” they plan to place orders (56% in 1Q19), while 33% said “maybe” (44% in 1Q19). Cowen said this points to an increased level of certainty about ordering within the same shipper group relative to the prior quarter.
• On a same-shipper basis, about 47% said in 2Q19 they will or may order railcars, compared to 48% in 1Q19. Roughly 52% do not plan to order railcars, largely in line with 1Q19. Within the 47% who are contemplating orders in the next 12 months, 64% said “yes,” they plan to place orders (56% in 1Q19), while 36% said “maybe” (44% in 1Q19). Cowen noted this again points to an increased level of certainty about ordering within the same shipper group relative to last quarter.
• Shippers expect their businesses to expand at an average rate of 2.4% over the next 12 months, down from 3.0% and below the survey’s long-term and 2016-present averages. Similarly, only 41% of shippers are more confident in the direction of the economy today than they were three months ago, down from 48% last quarter and below the survey’s 49% long-term average. Lastly, business levels have trended positive for only about 50% of respondents, compared to roughly 68% in 1Q19.
• Despite their more-cautious stance on the economy, 46% of shippers expect to increase their employee count over the next 12 months, up from 41% last quarter. This fits the narrative, Cowen said, of the Bureau of Labor Statistics’ June jobs report and is a positive counterpoint to the weaker macro data points in the survey.
• CN and Kansas City Southern’s rail service were rated most favorable, while NS received the lowest “positive” rating. The average “positive” rating of Class I rail service increased sharply to 63% from 49% in 1Q19. All of the Class I’s received better ratings, relative to 1Q19, with Union Pacific’s rating increasing the most (albeit with an easier comp). NS and KCS’s ratings increased the least. The average increase in positive rating in 2Q19 vs. the five-year 2Q average was 2%. “Given how important PSR implementation is to KCS, NS and UP, we will continue monitoring rail performance measures and service ratings.”
• Those citing improved rail service as a reason for why they shifted more freight to the rails in 2Q19 increased to 20% from 15% in 1Q19. However, fewer shippers answered that they would shift greater quantities of freight to the rails, should service improve further, “a negative read-through for the rails.”