April 17, 2018
We live in interesting times: Rails will produce an overall interesting quarter (Q1/18) with results starting later today (CSX) and ending early next month with GWR (5/3) and Berkshire Hathaway/BNSF (supposedly 5/4). Interesting because the results themselves will be….OK, actually, and versus reasonably tough comparisons: Consensus holds that the major rails, even after 3-5% estimate reductions since the beginning of the year, are expected to show a 15% YOY increase (the three major US-based rails, ¾ of the so-called “Big 4”, are expected to produce 20-25% YOY EPS growth). What’s not to love? Well, first of all, I don’t quite buy the hype – the cost of service failures, congestion, cures (overtime, training, leasing, reduced asset productivity, etc) plus a nip from higher fuel prices might make the rails’ usual beat-the-Street pattern harder to achieve. Higher pricing is on the way, but incrementally. The Canadian rails have to deal with the “optics” of the accounting changes to their margins (2-4+ points in OR). We’ll start learning more soon - CSX might not be the real bell-weather that UNP and NSC will be next week, but it will be an interesting story nonetheless.
So what’s the matter then, am I crazy or something? With earnings like that, why the need to bring out the old Ricky Ricardo line? Not because, after a good day in the markets, the WSJ referred to freight transport as “old economy” so I thought “old TV”. Because rail service issues continue – and with some exceptions (much noted: CSX & CN) we don’t really know why (except the old war horse, the cult of the OR). Supplanting the usual takeaways we look for (Volume/economic outlook, pricing, etc), the primary things we need to hear in the (once again/always) critical earnings conference calls is all about service and the rai value proposition:
Why did this happen (and really, it was all 52 weeks of last year)? Demerits to anyone who mentions “weather” (and I am writing that in NYC where we still await spring). I hope for some good ‘splaining; I don’t necessarily expect to hear that, leaving us all still somewhat in the dark (and loving it!).
What are you doing to address the issue? That has been taken care of, to some extent, by the required railroad letters to the STB, which I have already written about. Coming from the short line conference, we now know that a shortage of parts will hinder bring back stored locomotives, but crews should be helping soon and construction “season” is/should be underway….
Will fixing this require more capex? (You all know by now that I don’t thing that is necessarily a bad thing…. But one does expect a return for the rather large – more than a mere bag-of-shells - investment).
Can you convince me that this isn’t systemic, plagued by awful demand data, copying success stories incorrectly, and short-termism of (some) investors?
Is it too late to take advantage of the biggest modal competitive opportunity of the past decade? What side will “give in” to the pressure of the truck-driver shortage – Higher driver wages? Bigger (TSW), more competitive trucks - despite the infrastructure “challenge” (AKA “The Long, Long Trailer”)? Economic slowdown? Or will the rails be able to step up to the opportunity?
Filmed before a live studio audience: It’s not all bad news of course: Two of the carriers, UP and CP, are hosting Investor Conferences this quarter – always a good sign. You recall that three have done so in recent times (in chronological order, CN, GWR and, of course, CSX) – we also note that one other railway should. Opportunities abound – pipeline delays and the strange trade fight within Canada mean that the CBR opportunity form Alberta might actually have some duration; export coal remains stubbornly strong, construction remains needed, and of course the highway beckons….
Bang! Zoom! To the Moon! Rail traffic is actually improving nicely, with Q1/18 total traffic (that’s US+Canada, car-loads + intermodal) up 2.6% - but up 5.4% in the important month of March. The last month of the quarter saw 10/20 commodities up – led by sand+8% and – yes – coal up 7% - secularly-challenged US coal was up 8% versus tough (ish) comparisons - it was still down about a point for the quarter. Chemicals, at last were up 5% for the month, 3% for the quarter. Autos and grain and forest products were down – though grain eked out a small gain for March, after ¾ of a year of declines (perhaps the start of something, given BNSF’s comments to the STB?)..
Baby, you’re the greatest! Ahh – but intermodal….IM regained the growth throne – up 6% for Q1 – and 8% in March (AAR). The service-challenged Canadian rails grew intermodal 14% (March) and 9% (Q1/18)! The trucking opportunity might be missed more in the headlines than on the highways, as, using IANA data, trailer (TOFC) volumes were up 14.5% for the Q (17.6% for March)! Trade is so over, donchaknow, but international containers grew 7% and 8%, respectively. And in the single most important category, domestic (market share!) container traffic was up 6%. JB Hunts results (solid improvements in IM volumes and yield) suggest the opportunity hasn’t passed the segment, yet.
Hammina, Hammina, Hammina, Hammina! Politics is still a worry. Yes, the volumes in grain, at KSU, in international containers suggest the markets are shrugging off the hype; and, yes, it is reported that NAFTA negotiations are actually looking better as they come down to the wire (elections in Mexico and later, the US; the exemptions from the metals tariffs for the two trading partners that expire); plans to use a New Deal formula to possibly bail out farmers (oh! The irony!)….but looking onto the Chinese reaction to the US salvos is scary – not just soybeans, likely the highest margin if lowest volume of the big 3 grains for railroads (and remember, railroads don’t haul bailouts) but also plastics just as the huge US Gulf investment goes from construction to export….is enough to make one still feel on pins and needles, needles and pins…..
How sweet it is? We hope to learn from the calls and the upcoming meetings a sense of urgency, recovery timing, and then how rails plan to capitalize on their network and their modal positioning. We’ll learn the full answer one of these days, one of these days. But we’ll start this afternoon….
Anthony B. Hatch