Rail Supply: Takeaways From FTR; Wading In The New "Normal"

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  • We attended FTR Associates’ annual transportation conference where we had the opportunity to meet with railroads, leasing companies, and industry experts. No surprise, the demand environment, Precision Scheduled Railroading (PSR), and technology dominated the discussions. Based on our discussions over the past two days, we came away with the view that the market for new equipment has become increasingly challenged given the current macro and trade concerns. While we do believe that the OEM railcar market will be challenged into 2020, it doesn’t appear to be falling off a cliff. Hence, we continue to view the broader group favorably. Our top ideas, in order of preference, are WAB, TRN, and GATX. For TRN and GATX, we are centered on the stability of the leasing platforms coupled with capital deployment optionality, while for WAB, we are focused on its increasing leverage to technology and broad global platform in both freight and transit. Our Market Perform rating on GBX is due to its increased leverage to the OEM cycle and current demand trends.

  • Hitting The Pause Button. We walked away from our discussions with the view that H2 order levels could come in well below what we view to be a normalized 10,000-15,000 unit order level. With customers seemingly hitting the pause button on new orders given trade and broader macro concerns, we believe that the delivery level
    will weaken into next year. Given that view, we took our 2020 delivery estimate down, now estimating 2020 deliveries of 40,000 compared to our prior view of 50,000, but are maintaining our 2019 estimate of 52,000 units delivered (see Figure 1 on page 2 for detailed estimates). Railroads’ focus on increasing asset utilization through its PSR efforts have added to the concern with the increase in stored railcars, although we have heard of little in the way of concrete examples given the incremental decline in rail traffic throughout 2019 muddying the picture.

  • Rail Becoming “Smarter”. Railroads have been slower than other industries in adopting multiple layers of technology, however, over the past year, it has become a greater topic of discussion. From Amsted to Intellitrans (an ROP company, $358.48, rated OP) to Commtrex, the discussion was broad-based from adopting technology to improve the customer experience to increasing safety and reliability to predictive maintenance. TRN’s SVP and Group President of TrinityRail highlighted its work in creating a smarter railcar. We view the increasing commentary on technology in the rail industry as a net long-term positive for WAB, particularly given its expanded technology and software exposure with the GE Transportation transaction.