Rail Equipment Thoughts and Positioning: Cowen

Written by Andrew Corselli
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Cowen on Wabtec: "The guidance appears fairly solid given stubborn rail traffic declines and ongoing PSR implementation in the past 12-18 months."

Cowen and Company recently released its Railcar Industry Forecast, which predicts 21% and 9% declines in deliveries and orders, respectively, this year.

“We are modeling for a solid recovery in 2021, with railcar deliveries and orders growing 14% and 43% to 50.5K units and 51.5K units, respectively,” said Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason H. Seidl, along with analysts Matt Elkott and Adam Kramer. “This would represent a 1.02 book-to-bill ratio, above our expected 0.81 estimate this year and the first time the ratio would be above 1 since 2018, when it registered at 1.53. We believe our 2021 estimate for orders may be higher than some expectations despite being 14% below the 2005-18 average of 59.8K units.”

Cowen said it sees railcar orders and deliveries bottoming in 2020, with a rebound beginning late in the year and leading to a book-to-bill just above 1 in 2021. “This is as we expect 3% rail traffic growth next year—partly driven by likely truckload tightening—and elevated replacement of grain and flammable liquid cars,” the analysts noted. “We favor Wabtec, Trinity and Greenbrier, as valuations should expand, reflecting trough multiples.”

The analysts added that “fluid truckload market dynamics could help the rails win highway traffic. Rising truck insurance premiums, depressed TL rates, and driver recruitment headwinds from the buildup of the Drug & Alcohol Clearinghouse have increased small-TL-carrier exits. Bankruptcies were up significantly in 2019, a trend that appears to be continuing—if not accelerating—thus far this year.”

“With Wells Fargo (which owns the largest railcar lease fleet in North America at about 180,000 units) under a fairly new CEO, its railcar fleet, long thought to be for sale, could go on the market again,” they said. “Trinity and GATX may be interested in big parts of the fleet at the right valuations.”

With regards to the locomotive manufacturing and rail component front, Cowen expects Wabtec to “selectively continue its tuck-in acquisition strategy, but at a very low pace for the next year. After that, management could resume the pre-GET pace of about three deals per year, with a special focus on locomotive aftermarket services/technology as well as rail automation. We also maintain that Wabtec could itself attract the interest of large, industrial conglomerates. The company offers one of the most comprehensive ways to invest in freight and transit rail, domestically and internationally. Additionally, we believe it screens well from an ESG perspective, with roughly one-third of the business being transit, while rail freight also has advantages as being 3-6 times more energy efficient than truck.”

Cowen also noted that it is fine-tuning its 4Q19 and 2020 EPS estimates for Trinity to $.34 and $1.20, from $.33 and $1.25, respectively. Cowen’s SOTP $26 price target remains intact.

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