Two first-quarter 2021 surveys of rail shippers on pricing and business outlook as well as equipment needs conducted by Cowen and Company analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper indicate that, compared with the previous quarter, Class I railroad customers are anticipating somewhat higher rate increases, and a slight decline in new railcar demand.
1Q2021 Rail Equipment Survey
Order expectations by the shipper sub-group of railcar buyers declined slightly, according to Cowen Transportation OEM Analyst and Vice President Equity Research Matt Elkott. “This is true for total shippers and same shippers surveyed,” he noted. Some of the other metrics improved sequentially. “Into the 1Q print, we believe WAB [Wabtec] and GATX are well-positioned for positive reactions to earnings.”
Among the Cowen and Company survey insights:
• Mixed results. “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 1Q21 survey, the first three metrics deteriorated slightly, while the fourth improved. (In our 4Q20 survey, the first, third and fourth metrics improved, while the second deteriorated.)”
• Percentage of total shippers planning orders is down a bit. “Roughly 48% of all shippers surveyed said they will or may order railcars in the next 12 months. This compares with 51% in our 4Q20 survey and 49% in our 3Q20 survey. Within the 48% of total shippers who are contemplating orders, 50% said ‘yes,’ they plan to place orders, versus 54% in 4Q20; and another 50% said ‘maybe,’ compared with 46% in 4Q20. This points to a slight decrease in the level of certainty about ordering within the total shipper group. We believe this could be more a function of pandemic uncertainty than a reflection of underlying demand conditions.”
• Percentage of same shippers planning orders is down slightly. “On a same-shipper basis, about 46% of same shippers in 1Q21 said they will or may order railcars, compared with 48% in 4Q20 and 45% in 3Q20. Roughly 55% do not plan to order railcars, compared with 52% in 4Q20 and 55% in 3Q20. Within the 46% of same shippers who are contemplating orders, 59% said ‘yes,’ they plan to place orders (56% in 4Q20), while 41% said ‘maybe’ (44% in 4Q20). The results of this question are a slight incremental positive for railcar demand.”
• Need is there. “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 decreased to 62%, from 74% in our 4Q20 survey and 77% in our 3Q20 survey. This is an encouraging result and consistent with our view that the slightly tempered order outlook in Questions 1-3 could be more a function of pandemic uncertainty than a reflection of underlying demand conditions.” (Question 1, to all participating shippers: Do you plan to place orders for railcars in the next 12 months? Question 2, to all participating shippers: Level of certainty about ordering within group contemplating orders? Question 3, to same shippers: Do you plan to place orders for railcars in the next 12 months?)
1Q21 Rail Shipper Survey
Shippers expect rail price increases of 3.4%, up 20 bps sequentially and slightly above the survey’s five-year average, according to Cowen and Company’s Seidl. “Business trends in the first quarter ticked up nicely, with an encouraging business outlook for shippers,” he said. “Economic confidence ticked down slightly sequentially, while still maintaining a net positive confidence level. Overall, we see this as a positive for the group.”
Among the Cowen and Company survey insights:
• Pricing expectations again higher sequentially, slightly above five-year average. “Shippers anticipate rail prices to increase by 3.4% over the next 6-12 months, up from the 3.2% in last quarter’s survey and well above the 1.9% in our 1Q20 survey. The 3.4% result is above rail cost inflation, slightly above the survey’s five-year average of 3.1% and modestly below the survey’s long-term 10-year average of 3.6%.”
• Bullish railroad outlook. “Business growth expectations improved 1.0% sequentially to 3.7%, above the five-year average of 2.6%. The percentage of shippers expecting their employee counts to increase over the next 12 months improved 9% from last quarter’s response, a large increase compared with last quarter’s sequential decline. 58% of shippers answered that they are more confident in the direction of the economy today than they were three months ago, slightly down from 62% last quarter, while still above the survey’s 48% average. Finally, business levels over the past few months were ‘positive’ for 70% of respondents, up from 63% last quarter—levels we have not seen since 2018.
• Despite broad railroad declines, Kansas City Southern (KCS) shows continued strength. “In the first quarter, KCS (again) received the highest ‘positive’ rating, followed by CNI [CN]. The average ‘positive’ rating of Class I rail service remained flat sequentially at 53% in the first quarter, with CNI and KCS being the only railroads to see a sequential increase. The average y/y decrease in ‘positive’ ratings in 1Q21 vs. 1Q20 was 800 bps, compared to a 700 bp increase in 4Q20. NSC [Norfolk Southern] declined the most y/y, down 21%. 1Q21 ratings for the railroads were 11% worse, on average, than the five-year average rating. KCSM again received a better rating than its Mexican peer Ferromex.”
• Shippers’ businesses continue to improve to pre-COVID-19 levels. “70% of shippers who answered our first-quarter survey indicated that their business is back to running at pre-COVID-19 levels, while 30% answered that it isn’t. This is a sequential improvement compared to the fourth quarter, where 55% 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-19 levels; however, 8% answered that their business is 26%-plus below pre-COVID-19 levels (although this is down from 13% in the fourth quarter). Taken as a whole, we see this as a positive, as shippers have been able to navigate through the ever-changing macro-environment.”
• Rail stock insights, ahead of earnings. “We recently updated our first-quarter rail models to reflect carloads and cost associated with severe weather and fuel in the first quarter, causing us to take down numbers slightly. Given the positive trends seen in our survey, steady volume growth, and encouraging macro-backdrop, we highlight Outperform-rated CP, KCS, NSC, and UNP [Union Pacific].”