Amid Rising Railcar Demand, Who’s ‘Steeling’ the Show?

Written by Matt Elkott, Transportation OEM Analyst, TD Cowen
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Railcar demand is on the rise, but so is the price of steel, which Cowen and Company estimates has put a 15%-25% premium on newly built equipment.

We expect lease rate increases to accelerate; and despite the elevated commodity costs, manufacturing orders are likely to step up gradually, and we have modeled for this. We favor Trinity Industries, Inc. (TRN), Wabtec Corp. (WAB), and The Greenbrier Companies (GBX), in that order.

Multiple demand and supply dynamics continue to be increasingly favorable for the rail equipment sector, boosting our confidence in our long-held view that 2021 would see a railcar demand recovery. We detailed this in several reports over the past year, including September’s “Cowen: Railcar Demand Recovery in 2021.” (The table below depicts historical and projected railcar industry order and production data.)

Paradoxically, one such favorable dynamic on the supply side, steel, has been a double-edged sword, driving higher scrapping, but also hindering the translation of elevated manufacturing inquiries into orders. We estimate that higher steel prices have placed a 15%-25% premium on the price of newly manufactured railcars relative to this time last year.

This peculiar—although not unprecedented—dynamic should continue to steer railcar demand fulfillment toward leasing, thus spurring further rate increases in the coming quarters.

— The dynamic of higher steel costs boosting new railcar prices should continue to steer demand fulfillment toward leasing. —

We estimate that lease rates have risen by the low-to-mid single digits sequentially in the past three quarters. We expect this rate to accelerate somewhat in the next couple of quarters as operating lessor fleet utilization inches higher, underlying railcar demand increases further, and steel prices remain elevated.

While railcar buyers—made up of lessors, shippers and railroads—are likely to continue to attempt delaying big manufacturing orders in the near term to avoid commodity-driven price premiums, the industry’s cars-in-storage population, down about 30% since mid-summer, is no longer sufficient to fully support rising demand. As such, we believe buyers will have to begin pulling the trigger on larger orders. We are modeling for gradual increases over the balance of the year and into 2022 (see table above).

As a key participant in both leasing and manufacturing, TRN may be the best-positioned railcar supplier in the next 12 months. We are fine-tuning our rail equipment earnings estimates as shown in the table above.

For more on railcar orders, deliveries and backlogs, see “ARCI 1Q21: Railcar Orders on the Rebound?” Also, on May 7, CN reported a 1,000-hopper car order for TrinityRail.

Matt Elkott, Cowen and Company OEM Transportation Analyst
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