A: Rail earnings started off slowly, with 2 of the first three reports below consensus….CSX and Union Pacific (UNP) both reported pressured earnings and although they are in different stages of their PSR/PHR development, they did show 5 similar trends, beyond both showing slight EPS declines and shareholder payouts that dwarfed both Capex (and in the case of CSX, free cash generated)::
- Both railroads claim to have more to go in terms of PSR-fired efficiency and both targeted a 59% OR for 2020. (And both faced questions on the order of “Is that all there is?”)
- Both reported good operating and service metric improvements (and both have or will have new sets of numbers to deal with). And, as asked of UNP, both should think seriously, given the changes, opportunities, succession issues, etc, about having some form of Investor Day in 2020 (note – UNP’s last one, recall, was made almost instantly nugatory).
- Both faced/are facing economic/political volume headwinds, notably in coal, but both see an inflection against easy comparisons in H2/20; the volume trough might well have been the turn of the year (a sentiment echoed by other rails). There was lots of pushback on “conservative guidance”; at the same time there were questions on headcount reductions and preparedness for the inflection as well as how much more can come out (note – the headcount reductions in rails are beginning to get public scrutiny in an election year….)
- Both are done with restructuring their intermodal offerings (“de-marketing”), and while CSX delineated it and UNP did not (no one asked!), it is clear that for both of them, intermodal will be a hoped-for growth area (with economic and trade caveats, of course, and the speed of the return of trucking capacity equilibrium all being external factors). UNP has in fact reinstituted some 60 lanes and interchange points in its “premium’”(IM) sector.
- And, interestingly, both earnings calls featured prominent Canadian operating/PSR veteran hires opining on….pricing and marketing and volumes, oh boy! Not that there is anything wrong with that, it’s just not usual.