All the Patterns of a Pollack - Q1/19 Rail Earnings Preview

April 16, 2019

Greetings;

With CSX about to step into the batter’s box to lead off the Q1/19 rail earnings “game”, it is time for me to attempt to preview what to expect for the quarter, and (more importantly) the webcasts themselves as we all try to discern meaning form the snapshot-in-time provided by the Q1 financial results.  Some quarters are like a Mondrian, all precise and geometrical.  Other quarterly results are more like the work of the Pointillists, like Seurat – better viewed from a distance but then suddenly clear and meaningful.  I posit that Q1/19 will be more like a Jackson Pollack (see “#1, 1950”, below), all action and emotion whose meaning is far from clear and subject to wide interpretation.  In fact this will be the quarter for rails whose results might be the hardest to extrapolate in years (although given the overall market’s gain – the S&P 500 was up over 16% in Q1 – we cannot assume that complexity necessarily means reduced value; after all Jackson Pollack was a star in his own lifetime….).Superficially, the rails consensus earnings expectations (up 17% versus an overall market decline) – which they will beat, based on productivity gains in areas that remained dry, look pretty good,.  But what will it all mean?

 
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Why is that?  Volumes ….where did they go?  Why will the results of rail earnings in Q1/19 be so hard to extrapolate intermediate term trends from?  Four over-riding trends make up the answer, one self-induced, one economic, one political and one an “act of God”, all of which conspired to produce the worst quarterly traffic results for North American rail in 3 years – overall car-loads and intermodal, US & Canada, were down 1.1% for the quarter – which started off fine then plummeted in March (down 3.9% - only 4/20 US commodities showed gains, and 7 Canadian).  Once again we heard the cry “Thank God for CBR” – Petroleum/Products were up 21%!  And we know that will last, right?  Pulp & Paper was up just over 2%; metallic ores “up” 0.3%, waste +4% - and that’s about it.  in this context, the fact that intermodal was only down 0.4% was sort of a moral victory – although, as suggested by RTI,  when compared to truck tonnage (not units) which continued to grow, that’s cold comfort indeed.  And when one looks at grain (down 3% - -11% in March); coal (down 7% Q; -17% in March); the (temporary?) reversal of the chemical resurgence (-0.3% for the quarter), etc, etc – the uninformed mind might start to reel….

So what happened? What is the true nature of demand (fair, in my opinion, but hard to quantify).  And what is the true nature of the rails’ ability to handle that demand?  We’ll get clues in the comments on the speed of recovery, but wont see hard facts till later in the Spring.   – self-induced, economic, political and, finally, an act (acts) of God….Making Q2/19 all that much more important a clue to the intermediate term performance of the rails.

  1.  PSR – disruptions, de-marketing, etc.  This will be hard to quantify, but we do know, for example, that after dropping 7% of their base intermodal business in 2018, CSX plans to do the same this year (while trying to grow the remaining base, as they did last year).  What is happening in this regard to Union Pacific?  Norfolk Southern?  KCS?  Genesee & Wyoming?  The eastern carriers are showing good metrics – will the increased fluidity make up for lane closings (in the long term, yes).  Will demurrage increases make up for the volume shortfall?  No. The calls will tell all….right?

  2. Global/US economic slowdown….S&P 500 earnings are expected to drop 3-5% in Q1/19 (7/11 groups expected to show down results); full year consensus has already been reduced by over 5% from the start of the year.  The IMF reduced its full year global GDP forecast based on manufacturing weakness (tied in part to trade issues, below).  And there is no tax cut looming on the horizon….

  3. rade fears and disruptions – As RTI also noted, business inventories rose 0.8% in January from December, putting some heft behind the anecdotal discussion around “pre-ordering” in front of tariffs/border closings etc.  The 5%+ increase in LA/Long Beach transloadings (up to 52.2% of the total) was also attributed to front-loading.  The disruptions in the export soybean trade show what harm is being done to business interests tied to trade.

  4. Polar Vortex into Massive Flooding – particularly felt the US Midwest and in western rail volumes – again, RTI points out that the effects of the flooding in Nebraska/Iowa (and Missouri) on BNSF and Union Pacific alone in just 4 commodities (Stone/sand, coal, grain, “other”) “account(s) for all or nearly all of the declines in rail carloadings in March” (although the drop in sand has secular elements as well).  The JB Hunt earnings “miss” was clearly impacted by BNSF’s weather issues.  The recovery is already underway – this is something the rails handle pretty well, but it will obscure any secular trends (PSR) though we may see a faster-than-normal recovery process.

Key questions –

  • Rail Pricing in the midst of the vortex

  • Capex – increases after the flooding and need for recovery capacity?  Right now the scoreboard reads 5-1-1 (5 rails increasing capex, 1 flat and 1 down).

  • PSR – of course.  I just put it at #3 to see who was still paying attention.  NSC should show good operations, CSX too, obviously.  Will the Canadians still be the leaders of the pack?  Will UNP be able to demonstrate the successes in operating transformation given all of the weather “noise” ([perhaps in., again, speed of recovery).  How mush will KSU and GWR discuss PSR changes?  How much will BNSF reveal as Executive Chairman Matt Rose takes his leave (they will report at Buffetpalooza on/around May 3).

  • Data!  PSR may be controversial, Post PSR (“PHR”) may be the Renaissance 2.0 – but the initial PSR post-implementation program of data restriction (showing only “highlight” slides on the webcasts, for example) really must be resisted by the new wave.

  • Tech – PTC, PTC 2.0, etc – why is the paper shipper/shortline pilot program so far behind schedule?

Also of note:

  • Number One with a Bullet – Amazon debuts on the JoC list of Logistics Companies at the top….

  • CN is in a spat with the CTA over service issues dating back to the winter in Vancouver – pretty backward looking it seems to me….

  • And you complain about rail?  Trans-Pacific on time rates were only 38.6% for the first two months of the year – and in the all-water, East Coat lanes, only 31.5% (suggesting an opportunity to regain share for more service-sensitive products in LA/LB)Duel”

  • Class 8 truck orders dropped by 2/3 in March

  • Speaking of trucks, Anthology Film Archives presents “Jammin’ Gears – Truckers on Film” this month in NYC (think “They Drive by Night”, “White Line Fever”, “Duel”, Convoy” and the movie that drove more market share to the highway, “Smokey & the Bandit”)

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com