RRs-The Final Countdown (Plus MARS and Earnings!)



Big Day tomorrow – my birthday and something else….oh, right, “MARS”: TENTATIVE TOPICS &
SPEAKERS (mwrailshippers.com); for me, this will be preceded by appearing (Zooming) in a Wabtec
management conference. On the actual big news, the incoming administration, I have taken a slide
from my MARS presentation (see the bottom) mostly all good (very good in terms of trade and stability
and good in coinciding with the ESG interest and rails place therein). This issue of BusinessWeek
delineates “How China Won the Trade War”, hopefully, that’s behind us or is soon to be. The worry is on
the labor front.

Brief Calendar Update: Meetings are slow to come back (Delta said that they hoped to see 70% of
business travel returned by YE2023). The regional “ARS” meetings (Association of Railroad Shippers –
like Midwest/MARS) start in Chicago (zoom above) and so far virtual is the plan as announced or preannounced by SEARS, PNWARS, and NEARS – all of whom will do something virtual and hope to return to
live entertainment by the fall/winter meets. NARS – the North American version of ARS, was moved
from its usual May spot to the hopefully safe time period of September 7-9. Railroad Equipment
Finance is off for March, hope to be back in the desert in ’22. Notably, SWARS (southwest) is ON for
March 10-11 in San Antonio and I will….I hope….be there; it’s always high-powered and remains so this
year with Ottensmeyer (CEO-KSU), Alan Shaw (CMO-NSC), and carload honchos Cairns (CNI) and Miller
(BNSF): Southwest Association of Rail Shippers (swrailshippers.com). The fall meetings including IANA’s
Intermodal Expo, the (ASLRRA) short line conference, Railway Interchange, and of course RailTrends
2021 is still on schedule. Speaking of my partners at RT, Progressive Railroading magazine and
TradePress, they are holding a mini-conference on “Rails & Technology” with, among others, CIO (that’s
Innovation) Brian Hancock of KSU, zooming on February 17 (details TBA).

  • Squires talks at NRC Fireside web-chat – one of the conferences that went to virtual was National
    Railroad Construction & Contracting; a zoom highlight was a talk with Norfolk Southern CEO Jim Squires;
    the highlights include:
    The NSC board established a Safety Committee – while that’s certainly a good thing, especially in
    this emerging ESG age – but what prompted this? NSC was the XX-straight year winner of the
    railroad safety award (the “Harriman”); they won so consistently the industry retired the prize.
    Has something changed? Maybe we will get a hint next week….
  • “We’re not CSX” – I have placed it to be more startling than it was actually spoken – in reference
    to their slower, more collaborative approach to PSR (1.0), which Squires called the “no surprises
  • Squires reiterated that the NS was “fully committed to growth” (PSR 2.0)

At MARS – which had 533 “attendees”, slightly more than half of what the live meeting was likely to
generate, but impressive indeed. CP’s Keith Creel noted that he (personally) wasn’t going anywhere –
that is of course big news. Two big themes in his speech were further engagement with shortlines
(~15% of their volume), and ESG. To that end, their own CP-developed pilot program on hydrogen battery-powered locos could be in the test segment by H2/21. Yes, CP will develop and build the
prototype themselves (using the plentiful Calgary-area hydrogen-tech partners). Amazing….BNSF’s Katie
Farmer, whose own inaugural as CEO (the first woman CEO in C1 railroading) occurred on January 1,
discussed their historic, systemic “bias for growth” and discussed their own prototype test (with
Wabtec) battery loco (BEP); she also revealed their 2021 CAPEX program of $2.99B (it was $3B but we asked before midnight to get the discount). That number represents a 3% decline but still includes
$400mm listed undergrowth plans.

Speaking of Intermodal, IANA released their numbers and they confirm the strong year-end: December
units were up just under 14% (domestic up 16.4%, led this time by TOFC up 19.6% and domestic
containers up 15.9% - international up 11.2%. the full year was the pandemic – down 2% (domestic up
3% international down 6%); not bad recently. Rail service is catching up to the sharp end of the shark’s
tooth; although the JoC reports congestion/asset shortages in the Midwest, the bigger news is really
UP’s removal (or soon-to-be) of surcharges out of LA/LB. That doesn’t mean that volumes are in retreat
– in fact, the ships lined up in San Pedro Bay remind me of 2002 and (even) old(er)-timers of D-Day. The
issues of congestion etc are throughout the global supply chain (see last week’s piece, attached) and the
JoC reports that the larger ships, even if supported by infrastructure, bring their own set of issues.
IM service improving? But talking with shippers, it isn’t anymore the rails (or, at least not the rails alone
or singularly) that are the casing them angst, and for us, that’s good news. Supporting those stacked
ships is the fact that Chinese exports are booming, up 18% in December, 17% for the quarter – and up
35% to the US. Their imports were also up big (+48% in December) but nonetheless they hit about 52%
of their Phase One “goal”.

Meanwhile, JBHunt reported earnings above consensus, but IM volumes and margins were disappointing
(up only ~1%, and an OR of 91.1, +140bps) – due to west coast congestion and lost business
opportunities. It is worth noting that volumes were up 6% in December, a sign of improvement (but at
half the pace of their largest partner, BNSF). JBHT announced plans to acquire 6000 new containers, so
they are betting on continuing improvements into 2021. A downer note comes from the FT’s famous
Lex column, when (in the context of a discussion of supply chain issues between China and the EU,
wrote that “container volumes are unlikely to keep up with economic growth”. The FT is good but not
infallible; I suspect this is such an example.

Then the (Q4/20) earnings start….UNP and CSX on Thursday, KSU on Friday, the rest the following week
(save BNSF/Berkshire, TBA). Today’s WSJ had a sweet photo of a CSX train in its “Coming Week/Markets
Events” section. Interestingly, no mention of Union Pacific, which is this session’s leadoff batter and at a
market cap of ~$146B, twice the size of Chessie; nice picture, though. Going to the Journal’s website,
however, was less than helpful, as it announced that UNP would report Q4/20 earnings on April 29 (see
for example UNP | Union Pacific Corp. Stock Price & News - WSJ ), and CSX on April 20. This is a big
week of webcasts – the rails had all pulled guidance at the start of the pandemic, of course, and slowly
re-attached smallish bits back in – but claimed that they would tell a (or, to be fair, tell more) in January.

What we want to hear about: 1) Visibility 2) Sustainability (real, metaphorical – the whole shebang); 3)
Normalcy (sic); 4) Info on tech spend/capital spend/labor talks….What we don’t care about is Q1
estimated OR.

Key points to remember: 2019 was a lousy year. Comparisons to 2020 will be ridiculously flattering
through spring. So far, we’re still in a ($370B of tariffs) trade war with China. Near-shoring has been all
talk little action. Ag looks great. Intermodal recovery and service (and capacity) will be critical.

The rails outperformed quarterly earnings projections in the first half of last year, flexing their cost-cutting muscles, newly pumped up with PSR, in a known downturn (FY20 headcount down 14%; T&E
was down 19%). Then in Q3/20, they didn’t - as the upswing began (to be fair they handled the gyration
quite well). What will Q4/20 show us? The S&P earnings tally is expected to be about 7% down, YOY.
The rails will be up (high single-digit) and then show double-digit (~15-20%) growth in 2021. But
remember, that is against 2020, and 2019 was only lousy as well. One thing stands out in a generally
over-weight rated group – CSX, which outperformed NSC in 2020 traffic (at -5.7% finishing second to
CP’s -2.2%; beauty is relative – NSC was last at -11.9%)

But there is a lot of confusion – after all the consumer, key to the intermodal recovery, ended the year
limply (December retails sales -0.7%, though Industrial Production increased by 1.6%). For 2021 the
economic experts, perhaps not taking the timing of re-stocking into consideration, put US GDP growth
at + 3.6% (Canada +4%, Mexico +3.3% - China +8%+). Stocks as we all know did well (institutional funds
up ~19%; the overall market up ~70% from the C19 low point) and over 16% for the year). The worst
industry group was….coal (surprised?), down by ~50%.; among the better ones were soybeans (+40%)
and corn (+29%); the DJTA came in at #22 on the WSJ Hot-100, at +15% (and that includes airlines).

We discussed (AAR) volumes in the last piece – note that CSX outperformed NSC and the group average
in terms of volume, finishing second to CP’s -2% at -6% - beauty is relative of course. One thing of
interest is that the CSX numbers are half of NSC’s decline., overall, and they showed an increase (and
top-ranking over CP) in intermodal (+1.5%). Yet the Street expects their earnings growth to be ½ of NSC
this year, and the lowest in the group. I call that a lack of understanding of PSR 2.0 (the Canadians get
this, too).


  • Today’s WSJ on the incoming administration stated that EV was likely to be at the top of the list
    for climate-related initiatives”, showing that the rails need to re-prove to the rail-fan President
    their E(SG) credentials and make sure that their own technological improvements get regulatory
    support if not subsidization….
  • This strange, brewing tension between the USA (and the new admin as opposed to the one with
    the wall-building bills) and Mexico bears watching. AMLO is….hard to analyze. Rising antiYankeeism isn’t good.
  • Final goodbye – a federal court rejected the pro-coal “ACE” initiative (a regulatory rollback by
    the EPA)
  • Infrastructure funds – the key to the Short Line boom and possibly bigger partners in a government
    effort (after a lot of talk but no walk in 2017-18, if anyone cares to recall “Infrastructure Weak” –
    oops I mean “Week”; USG spend was 2.3% of GDP on average the past 3 years) – they
    collectively did $90B in deals last year, down a lot from 2019 ($227B) but pretty good for a
    pandemic; they have (WSJ) over $225 in dry powder….THE ASCE said that the current state of
    subpar infrastructure would cost the US economy about $10 trillion through 2039 (no word yet
    on their next Infra Report Card).
  • Amazon bought (for the first time) 11 B767-300 cargo planes
  • Soon I fear that we will be saying goodbye to Ron Batory, universally thought to be the best
    Administrator of the FRA ever (here’s where the usual slow pace of transport office staffing in an
    incoming admin would actually be helpful)….
  • Some funny stuff from Down Under: Lamb chops down imagined walls in Meat & Livestock
    Australia ad | Advertising | Campaign Asia



Anthony B. Hatch 
abh consulting
Twitter @ABHatch18