Rail Equipment Webinar Takeaways: Cowen

Tightness across a wide array of freight cars has continued, and with supply chain challenges limiting the industry’s ability to produce to demand, the lease rate momentum looks sustainable, according to expert panelists at Cowen and Company’s Jan. 19 webinar on the current state and outlook of the rail, locomotive, and railcar leasing and manufacturing markets.

Secondary market valuations remain strong despite higher interest rates. Additionally, we expect a 10th consecutive sequential quarterly improvement in spot rates in the fourth quarter and positive guidance in the leasing space.

Our panelists—Railway Age Financial Editor David Nahass, National Steel Car’s Bob Pickel and NorthEast Logistics’ Dick Flynn—described favorable demand conditions and supply tightness across a wide spectrum of freight cars, including aggregates, gondolas, plastic pellets, grain cars, autoracks and boxcars. On the tank car front, qualification and maintenance are likely to result in intermittent supply tightness for the foreseeable future, although tank car fleet utilization statistics might show the opposite optically, as cars are taken out of service for inspection.

Manufacturing inquiries and orders remain solid. This is consistent with the results of our fourth-quarter 2022 Rail Equipment Survey. The main risk to the inquiry-to-order translation is the industry’s ability to respond to demand fully and in a timely manner, as lead times stretch out several quarters in many cases.

Access to manufacturing labor remains constrained across North America, and components continue to be a challenge. The continued strength in underlying demand for railcars coupled with production challenges should be supportive of the ongoing lease-rate momentum. We expect a 10th consecutive sequential quarterly rise in spot rates in the fourth quarter. When it comes to the secondary market, the lease rate strength appears to be offsetting the negative impacts from high interest rates, keeping valuations very strong.

This rate and used asset strength should mean positive 2023 guidance from GATX, and to a somewhat lesser extent Trinity Industries, Inc., which must contend with lingering supply chain issues in its manufacturing segment. We had been cautious on The Greenbrier Companies into its fiscal first-quarter 2023 print, but the bar has been reset. We remain decidedly constructive on Wabtec, but are cautious in the near term into the print.

One of our expert panelists noted meaningful improvement in rail service and dwell times in some key regions compared with the same time last year. If the service improvement continues, the railroads’ ability to add previously unaccommodated freight will be key, because if service improves dramatically and quickly (not what we’re assuming), and if the improvement does not result in incremental volumes, demand for railcars and locomotives could see serious headwinds in the intermediate term.