According to Cowen and Company’s recently conducted second-quarter 2022 Rail Equipment and Rail Shipper Surveys, the outlook for railcar orders is positive, and rail shipping rates will continue to increase. Details follow, plus insights on the Class I railroads, ahead of earnings.
GATX has taken advantage of low interest rates over the past few years to improve its debt profile, which is currently 90% fixed, with an average maturity of 10 years. Meanwhile, spot lease rates are expected to continue their seven-quarter run of sequential growth. This should lead to progressively higher returns for the company, which is now likely to focus on locking into much higher lease terms.
At Cowen and Company, we are adjusting our railroad estimates ahead of second-quarter 2022 earnings. Continued rail congestion is hindering volume (still below 2019 levels), while pricing is expected to be on par with first-quarter levels.
Widely reported excess freight from China due to shutdowns appears over-hyped, and a potential upcoming backlog (which is expected to arrive in the last week of June) is likely from inventory pull-forward, equipment challenges, and a challenged rail network. Our panelists—the head of a West Coast port, the CEO of a drayage company, and the CEO of a container consolidator and intermodal company— were bullish of 2022, but expect softness in 2023. Consumers continue to lean into “Dinner and Disney” in a spending shift.
On May 31, we held a discussion with five expert panelists who provided insights into the current state and outlook of the rail, locomotive and railcar leasing and manufacturing markets. Overall, railcar demand recovery has been driven largely by freight cars, but our panelists indicated that tank car utilization and rates are rising. If this continues and eventually leads to higher tank builds, it could be a margin tailwind for manufacturers. As for the broader railcar market, inquiries remain strong, but labor and disruptions could limit production. Locomotive upgrades remain solid.
We hosted virtual investor meetings and a group call with Justin Roberts, Greenbrier’s Vice President Corporate Finance and Treasurer. North American demand remains solid, and the production ramp-up appears set to occur without additional disruptions. In Europe, the Ukrainian conflict seems to have caused transitory headwinds, which, we believe, could create noise. We remain constructive but are slightly cautious in the near term.
U.S. diesel pricing remains elevated, passing along significant costs to shippers via fuel surcharges. At Cowen and Company, we believe sustained high diesel pricing will ultimately benefit the railroads and IMCs (intermodal marketing companies) as shippers explore different modes of transport.
We hosted another Suds with Seidl event featuring leaders across the railroad industry. Rail service continues to be severely challenged, although there have been some slight improvements in recent weeks. Rails continue to have tremendous pricing freedom, and are capitalizing despite service metrics. Intermodal demand remains high, although the recent Blume Global supply chain management platform cyberattack outage has impacted service.
Wabtec Corp. posted “strong” first-quarter 2022 financial results, despite “rising costs, continuing supply disruptions and the impact on our business due to the conflict in Ukraine,” President and CEO Rafael Santana reported on April 27.
Despite escalating costs and pandemic-related challenges in the second fiscal-quarter ending Feb. 28, 2022, The Greenbrier Companies achieved its “fifth consecutive quarter with a book-to-bill ratio exceeding 1.0x on orders approaching $1 billion,” President and CEO Lorie Tekorius reported on April 6. “Greenbrier ended the quarter with backlog at levels last seen six years ago.”