Lowering the bar one more time: Jason H. Seidl

“We are lowering earnings expectations for most railroads to reflect traffic results,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, regarding upcoming second-quarter financial earnings of the Class I railroads.

“While a material recovery in volumes remains unlikely in the near term, the declines should moderate at the same time that carriers right size their networks. Once expectations are fully reset, and given pricing is holding up well, long-term investors may see unique buying opportunities in the rail sector.”

Revising estimates and price targets

“We are lowering our 2015 and 2016 EPS (earnings per share) estimates for all the railroads in our coverage universe, except Union Pacific (UP), for which we lowered estimates in our just-published, July 6 report, Upgrading to Outperform: Seeing the Whites of their Eyes, and Genesee & Wyoming (GWR) , for which we lowered estimates in our June 11 report, Guidance Reduction Affirms Our Near-Term Cautious View of Rail Sector, following the company’s updated guidance. We are also lowering our price targets on all the companies except UP, GWR and CSX,” Seidl says.

Nearing the light at the end of tunnel

“We have been cautious on the rail sector as a whole for much of 2015 . While we still believe that a material traffic recovery remains unlikely in the near term, the declines should begin to moderate at the same time that carriers adjust their operating resources to the current environment. Further coal downside is limited, in our opinion, as most natural gas switching has already occurred, and year-over-year comparisons become less difficult in 2H15 (second half of 2015). On the pricing front, the 2014 capacity tightness and lower oil prices have enhanced the railroads’ ability to push through base rate increases. Even if traffic remains at current levels, the railroads should be able to push through compensatory rate increases as they did during the great recession. Investors’ eyes will likely turn to 2016 when easier traffic comparisons, improving service measures and continued share repurchases should aid earnings growth for the railroads,” Seidl says.

Street expectations should drop a little more

“Since our aforementioned June 3 downward revision of rail estimates, consensus forecasts have come down, and we believe they will once again drop closer to our new estimates established in this report. While this could place some near-term pressure on rail shares (albeit mild, as many investors already lack confidence in the consensus forecast), by the time the carriers start reporting earnings, expectations should be fully reset, and any cautionary comments made by management should not come as a big surprise. That should create unique buying opportunities in our outperform-rated rail stocks,” Seidl says.