Here we are at that time of year again – gathering in NYC….sigh. But it is Railtrends, 2020 version, I have again attached my Preview as well as the schedule and the slide deck from my presentation on the Analyst Panel. My “Happy Hour” wine has arrived (thanks, TradePress!) and is breathing, ready soon to pour (in a glass or on my salad). This RT will be different, the times are different, but we are beginning to see what the future may look like….The Top Ten Themes for the Future of Freight Railroading that have slowly, partially or wholly emerged from the last quarter, the recent traffic, other conferences, the election, recent Pandemic news, etc etc:
- Q3/20 was a very tough quarter. Earnings mostly “slightly disappointed” raised Street expectations that followed the late summer volume jump led by intermodal. The quarter may have ended well, but the rail network is not really built for the sharp (“shark’s tooth”) volume gyrations engendered by the pandemic that it experienced over the last two quarters. As such, it is very hard to draw broad conclusions from the data, or the commentary….
- Except perhaps that ESG is the flavor of the day – but as pointed out by our RT Innovator of the Year CSX CEO Jim Foote, that you have to provide good transportation value (price/service) to even enter the ESG conversation with a shipper. That said, it surely isn’t going away and in fact, offers some real advantages to rail.
- Rails' ability to prove out stability (in margins, cash flow) in unstable (volumes) times shows their ability to “flex” variable and semi-variable costs and is a lesson-learned by the investment community.
- There was clear volume momentum by the end of the quarter into the current period. Currently, volumes are up, year over year, but remember 2019 was a poor year itself. Still, the trend, aided by re-stocking, housing, grain exports, and ecommerce, was very positive. October IANA numbers show the intermodal ecosphere growing at 7%, and that’s split Domestic +8%/International +6%. Will it last? Is re-stocking a one-time event? What is the secular trend in the consumer spend split between goods and services? Yesterday’s WSJ headline stated, “Retail sales growth loses steam” (up 0.3% Q/Q after September’s +1.6%). So – can the railroads maintain service levels in a strong (or at least stronger) economy in order to take the long-awaited share recovery move in carload and (especially) domestic intermodal?
- Visibility has only slightly improved. Most questions about 2021 or about market share battles were deferred to the January (Q4/20) webcasts; business leaders everywhere are concerned (as we all are) about a second wave of the C19 virus and further lockdowns. The recent re-stocking led IM boom was consistently described as “lasting well into the first quarter (emphasis mine). One result of the lack of clarity is….
- Cash on hand has increased sharply at many railroads, buybacks have either remained suspended or have played out in a muted fashion. Given the new movement of (some) Class One rails to look to buy “off-line” or connecting short lines, etc there may be a pent-up M&A boom-let when clarity returns. Three thoughts:
- there have been some deals or rumors of such despite the lack of visibility – note the negotiations of CSX/Pan Am, for example (whereby CSX may – may – be applying Hunter Harrisons unstated but deeply felt belief that every mile owned or controlled by him and his railway was good for said railway, its’ shippers and shareholders, and the world at large) - and
- I am not (at all) referring to big-rail consolidation but rather to things like CN-TransX and CP-CMQ (etc) and finally
- this also isn’t a discussion of activist -investor interest and the like….
- Strong operations were critical to the rails handling the “shark’s tooth”; in the Q3/20 the metrics mostly trailed YOY (of course) but the resiliency and recovery in the network was at lightning-speed compared to even the recent past and prove out, in a big way, the value of PSR and highlights the value of luck in any business sector – it is certainly fortunate that the rails in the US undertook PSR enough before the C19 lockdowns that it had become second nature. I should point out that not everyone is convinced – there has been some shipper pushback on the rails declaring congestion victory (for example around the LA ports) but I would posit that conversation wouldn’t have even been possible only a few years ago.
- That doesn’t mean that the regulatory environment will be any less busy nor, possibly, adversarial in 2021. A recent NITL seminar with the Surface Transportation Board Vice Chairman Martin Oberman revealed a real sense that the STB isn’t sold on the virtues of PSR or on rails real interest in “pivoting to growth” versus focusing on expense reduction only at the bidding of Wall Street. We’ll hear from another (of, currently, three) STB Commissioner, Patrick Fuchs, on Friday. Note – railroad regulation in the US is not a partisan issue, and the election will not change this (a rate case between Mega Industries and a Class One isn’t and never has been in the modern era an issue for Democrats and Republicans). We will also of course hear from the Mexican regulator and from the trade associations that surround the rails led by the AAR, ASLRRA, RAC, NRC & RSI. That is a lot of letters but really means a lot of work in the coming years.
- That said, the new Administration will have an impact on the rail group if a low-key one – and a positive one at that. As a Railways Analyst (as opposed to the views of a private citizen), I see a positive impact from DC:
- Some negatives for rails - corporate taxes might go up, but from ~21% to 28%, still down from 36% prior; general business regulations may be restored – and a big risk would be if two-man crews would somehow be legislated/mandated. There could be changes in the Harbor Maintenance Tax which could affect port shares.
- I see some uncertainties – starting with infrastructure, supposedly a priority of the incoming administration. Perhaps the Georgia senate runoffs will come into play there. Also, issues of technology and regulation (and modal fairness) will come into play as the G-for-Green portion of ESG gets more play in DC (not that that’s hard).
- But those negatives are vastly topped by the restoration of stability, starting but hardly ending with trade policy. And continuing with improved relations with our allies and trade partners, and a desire to work- multilaterally - within the WTO. And here I am talking about trade in goods, which could end up (or start) on a railway, not services or IP. We will have to see the appointments (etc) but it is clear that a multilateral approach (FT) and a healthier relationship with the other USMCA players will create an environment more conducive to investment, be it FDI, near-shoring, or otherwise pro-trade. And trade is good for rails.
- China won't roll over – just this week they announced their RCEP trade deal (a watered-down TPP without the US and India and started by ASEAN – but still….). And there’s talk about their wanting to re-negotiate the Phase One deal that has helped underpin the grain export boom in the US. But that was really down to demand (and supply), not deal-making….
- Longer-term, how will supply chains change and how will rails be able to participate in them? Ecommerce exploded in Q3/20 (from 16 to 21% of retails sales – quarter to quarter!) as we all know. This represents as we also know the acceleration of an existing trend….but what we might see change is a slight deviation from JIT requiring regional hubs or more “mega-DCs”- which could allow for the density that would be attractive for intermodal. CSX has recently gone on record as saying that they expect to grow carload business by “a point or two” above GDP and IM at 2X/GDP. That requires consistent and faster service – you know the drill.
- Technology need is growing. This could have been written for any prior RailTrends, for sure – and will be for every future one as well. Using a football analogy, we need offense (shipper-facing) technology as much as defensive (improved efficiency) although the helps consistency (fewer derailments, etc) helps the offense, too (like a ball-hawking cornerback can). Given that, Rail Pulse’s first (?) public presentation will be of tremendous interest (and I have heard from other start-ups and newcos interested in helping with the rails’ passing game and other scoring opportunities
- Short Lines continue to prove out their investment thesis - everyone wants one, from existing short line holding companies, to Infrastructure Firms to (some?) Class One rails. There seems to be always a lot going on – not just the ongoing Saga of Pan Am, or CN’s own line sales (or TranStar or…) but more.
- Short Line expert Roy Blanchard in his WIR notes that Cleveland Cliffs purchase of the US ops of Arcelor Mittal brings with it 5 short lines, bringing their total to 6 (will they “pull a US Steel” and seek a sale? If so there will be many, many interested buyers.
- Roy also notes a change in the complex control/ownership of Pioneer Railcorp
- Omnitrax saw its owner, the Broe Group, lift up and out the CEO, Kevin “Shotgun” Shuba (OK, the nickname was that of his….uncle? the Brooklyn Dodger outfielder). It’s terrific and universally considered well-deserved for Shuba, a loss for the rail who now seeks a replacement (interesting timing, that).
- Anacostia’s Pacific Harbor Lines, the switching railway for the LA/LB port megaplex, signed a deal with Progress Rail/Cat for a (fully) battery-powered locomotive. ESG, anyone?
- Upcoming schedule: It only seems that the year ends after RT but of course that is not the case. In fact, next week I will speak at two virtual events after a much-anticipated introductory call with the new CIO of the CN:
o An Investor Call with Coleman Research Monday (11/23) at noon – if interested, contact your Coleman sales-person
o The following day (11/24 at 11 am) is the Traffic Club of New York panel, where I will participate along with, among others, my RT20 panelist Larry Gross.
o My annual Holiday Luncheon with the Sandhouse Rail Group/Northwestern University Transportation Center is scheduled for noon Central on December 6 – I will make my own ziti, unfortunately, and miss being in Chicago. (it’s not listed but trust me, it’s on)
o And to start 2021 – MARS will hold their virtual meeting on (really?) January 20, 2021. (also not updated….)
- The grain boom is continuing – the USDA raised its export estimates (and lowered its yield and thus carryover numbers - leading to another big planting year?) and the Canadians set records on a monthly basis. Imagine – Ag as the stable savior for rails in an uncertain time! According to the US Farm Report, the key for (calendar) 2021 is our and international harvests – the demand is there. Recent issues in the Ukraine (production down by 20%) and Argentina (where export taxes are designed to lower the Peso and curb inflation rather than aid grain sales) are positives; the decision by Russia not to embargo their wheat but rather push exports is less so….
- Recent related earnings have been “constructive” – strong top-line growth from key shippers such as Home Depot, Walmart, and UPS….and according to the WSJ/Heard on the Street, “container shipping companies long ignored by investors, have become unlikely market darlings”.
- The 2020 version of the “Railroad Facts” book is out and available from the AAR. Speaking of facts,
- Sometimes Wall Street doesn’t have all of the facts - Jim Cramer makes a case for Union Pacific to acquire Kansas City Southern - "Rather than continuing to buy back huge slugs of stock like CSX, I think Union Pacific should just reach out and acquire Kansas City Southern," the "Mad Money" host said. See CNBC.
Look for a Railtrends Review and many in-conference tweets!