Suds with Seidl: Positives From TD Cowen ‘Railroad Happy Hour’

Written by Jason Seidl, Matt Elkott, Elliot Alper and Uday Khanapurkar, TD Cowen
Yes there is an official “Suds With Seidl” beer glass. Just remember Rule G if you’re on duty! William C. Vantuono photo.

Yes there is an official “Suds With Seidl” beer glass. Just remember Rule G if you’re on duty! William C. Vantuono photo.

Industry leaders were more bullish on rail and intermodal at the latest “Suds with Seidl” event at TD Cowen, as they see strong February trends after some weather-related weakness in January. The 2022 labor challenges are largely in the rearview mirror. And J.B. Hunt’s purchase of Walmart’s intermodal assets brings the company closer to its goals without diluting the market, and other intermodal companies could stand to benefit.

Severe weather created a soft start to the year, though all panelists (excluding energy) spoke to strong business trends through February. Chemicals, paper, and bulk segments have all rebounded after a soft 2023 paper market, and trends began improving materially starting in December (which one panelist attributed primarily to companies working through excess inventories). Our energy panelist has seen downward pressure on demand with natural gas prices sitting at multi-year lows. His outlook remains fairly bleak as wells are coming offline and crews are sitting idle. Two panelists highlighted that Norfolk Southern is addressing some challenges in the Northeast and going after some new business (waste) which it hasn’t showed in the past.

Short lines acknowledged that improved service is supporting volumes on the network, with one short line panelist pointing to CSX‘s focus on last-mile service and the final consumer that is well-documented. Indeed, another panelist in the railcar repair space saw their 2023 revenues grow 20% as repair demand exceeded shop capacity in the year, aided by improved network fluidity.

Labor retention is moving in the right direction. Short lines noted that employee turnover rates stabilized in 2023 following increasingly difficult hiring and retention conditions in 2022. Turnover rates are expected to improve further in 2024. One short line panelist highlighted that turnover sits at a little under 20% of the total craft employee base. Commentary suggests that the current rail workforce is still relatively fresh, and the improved retention has come with overtures to labor in the form of defined off days and scheduling. While we continue to believe that the cost structure for North American railroads are elevated on this account, we note that sustained improvements in retention would allow for eventual efficiency offsets.

Walmart’s intermodal asset sale of approximately 13K-14K boxes to J.B. Hunt will be a positive for everyone, as other intermodal companies (Schneider and Hub Group) could win new business as Walmart looks to not keep all its eggs in one basket, according to our panelist. J.B. Hunt will need to retrofit the boxes and already has a significant amount of boxes stacked, so new box additions will 1) take some time to become available and 2) get J.B. Hunt closer to their long-term box goal without diluting the market. The same panelist was less bearish on a freight turnaround and now looks to the second-half (previously he had looked out to early 2025 for a recovery) for a potential turnaround in the over-the-road market, and intermodal company market thereafter.

U.S. Mexico cross-border rail service continues to be a bright spot. A major short line player on our panel noted that transit between Mexico and U.S. ports has been facilitated significantly by new shipping vessels. The port-to-port service involves a 3.5-day transit and more importantly is materially more consistent. Cross-border business remains robust. We remain encouraged by cross-border trends and believe it will be a long-term area of growth of the industry. One panelist in the rail repair and maintenance business highlighted that geopolitical tensions with Mexico are a noteworthy risk to consider.

Further Reading:

Tags: , , , , , ,