Cowen: Need a DOT-117? It’ll cost you a grand

Written by Stuart Chirls, Senior Editor
tank car

A 25,500-gallon DOT-117 complaint tank car. Photo: National Steel Car

Analyst Cowen and Co. this week hosted its quarterly rail equipment conference call with expert panelists across the industry spectrum.

In a note to investors, analyst Matt Elkott wrote that the panel found DOT-117 tank cars are just about fully utilized, with lease rates reaching $1,000 per month. On the manufacturing front, inquiries for railcars in general remain strong, but the rate of translation into orders may have ticked down slightly as buyers mull geopolitical developments. “All in all, the tone on the call was largely in line with, to somewhat more cautious than, what we heard on our April call,” wrote Elkott.

The total locomotive new build and rebuild market may have bottomed in 2017. One panelist noted that, in addition to the GE new/refurbished orders announced by a number of Class Is (CN, Norfolk Southern, Canadian Pacific, Kansas City Southern), a couple of other railroads may be placing refurbishment orders with GE this year. He indicated that the locomotive market is currently tight, and that some locomotives that were built in the U.S. but have been in service in Australia may get bought by North American customers, for the purpose of bringing them back and refurbishing them.

This panelist also believes the Wabtec-GE Transportation merger makes sense for the two companies as it has complementary aspects. Wabtec’s PTC technology could help GE Transportation in the development of fully autonomous locomotives, which, he believes, could be the next driver of the locomotive market in the longer term.

A railcar builder on the panel noted that inquiries for new railcars remain strong, but the translation rate into orders may have decreased slightly as buyers try to make sense of tariff impacts on their businesses and the overall economy. That said, the panelist believes the industry’s 2Q orders could match the 10.3K units in 1Q.

“The modest recovery in spot lease rates appears to be continuing but still not material enough to get lessors very excited,” Elkott noted. “We believe another modest sequential quarterly increase (low- to mid-single digits) in average lease rates should occur in 2Q18. Frac sand car lease rates are still near levels seen only at the height of the crude-by-rail boom, although there are signs they may be easing slightly. DOT-117 tank cars have seen a material increase and are now in the $850-$1,000/month range. This momentum is likely to continue if the traditional buyers of these cars resist the temptation to add big numbers of newly built units to their fleets, given that the memories of the last CBR bust are still in their minds. There is still concern among lessors that the industry is overbuilding in some car types.”

Cowen “continues to favor” the shares of Wabtec Corp., American Railcar Industries, Trinity Industries and Greenbrier Cos.

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