Cowen and Company

Cowen 3Q2020 Surveys: 2021 Railcar Recovery, Shipper Pricing Expectations Higher

According to two third-quarter 2020 surveys conducted by Cowen and Company analysts Jason Seidl, Matt Elkott and Adam Kramer, freight car order expectations by the shipper sub-group of railcar buyers have risen, “reflecting a net incremental positive for demand”; and rail shippers expect rail price increases of 3.1%, up 80bps sequentially, as “economic expectations increased sequentially and many are now in line with the survey’s averages, if not higher.”

Cowen Pre-3Q20: ‘Fine-Tuning Rail Estimates’

Class I third-quarter earnings are coming up, and Cowen and Company analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer are fine-tuning their models “to reflect carloads in the quarter, mix, fuel, and other adjustments.” 3Q20 “saw a divergence between carload and intermodal traffic, with the latter driven by pent-up demand and tightness in the trucking market.”

Cowen: Is the COVID-19 Recovery Sustainable?

Intermodal’s growth path may help railroads sustain COVID-19 recovery. “Participants from Class I railroads were positive on current trends and cautiously optimistic that these trends can continue for the remainder of 2020 and beyond,” Cowen and Co. analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer reported, following their attendance and participation at the North East Association of Rail Shippers (NEARS) Fall 2020 Virtual Conference. “Continued tightness in trucking is benefiting intermodal.”

Cowen: Railcar Demand Recovery in 2021

In the two weeks following Cowen and Company’s mid-September Transportation and Sustainable Mobility Conference, analyst Matt Elkott, with input from colleagues Adam Kramer and Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), noted that railcar inquiries “have ticked up. While translation into orders may not yet be commensurate with inquiries due to election and pandemic uncertainty, there appears to be an improvement in underlying demand” that should carry forward into a recovery in 2021.

Freight Fundamentals Across All Modes Are Strong: Cowen

COWEN AND CO. GLOBAL TRANSPORTATION & SUSTAINABLE MOBILITY CONFERENCE TAKEAWAYS: “Railroads are focused on adding back traffic at high incremental margins, though rail network congestion persists,” Cowen and Co. analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer reported following presentations by several major carriers. “Freight fundamentals across all modes are strong, with retail and CPG (consumer packaged goods) restocking of inventories a major driver of the current spike in demand. Many customers are choosing to renegotiate TL (truckload) contracts early as spot rates just eclipsed 2018 peak levels and are likely headed higher.”

Cowen: “COVID-19’s Effect as Large As The Great Recession”

“Permanent changes in trade flows will likely cause the Port of LA to permanently lose about 15% of its market share to Gulf and East Coast ports, a clear negative for Union Pacific but favorable for CSX, Kansas City Southern and Norfolk Southern. COVID-19 has had as large of an effect as the Great Recession. Peak season expectations were mixed to positive, with retail inventory replenishment likely needed.”

Cowen: “Cash For Clunkers,” Spot Lease Rate Recovery and Other Observations

“A resuscitation of a long-futile push for railcar scrappage tax subsidies may be under way. While the effort is in its infancy, and the outcome remains speculative, we see success as less of a long shot than it has been at any time in the past. This would be positive for railcar suppliers, including Trinity and Greenbrier, and metals companies such as Schnitzer Steel, Commercial Metals Company, Nucor Corporation and Steel Dynamics.”

Cowen: “Concerns Around KSU’s Concession in Mexico Are Overblown”

“We view concerns around Kansas City Southern’s concession in Mexico as overblown. The exclusivity provision cannot be revisited until 2027 and the concession remains in effect for 20 years after that. Further, KSU is improving its operations via PSR, which should aid Mexico as reliable rail service is likely to be a necessity for the country as it grows its manufacturing base. Reiterate Outperform.”

Takeaways From Cowen’s 2Q20 Rail Equipment Survey

“Order expectations by the shipper sub-group of railcar buyers were mixed. While a smaller percentage expects to order railcars, the certainty level about ordering has increased. Among railcar suppliers, we favor Trinity for the flexibility of its manufacturing/leasing model, and Greenbrier for its international diversification and cost cutting. GATX’s lease terms offer it some protection.”

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Takeaways From Cowen’s 2Q20 Rail Shipper Survey

“Shippers expect rail price increases of 2.3%, up 40bps sequentially, above rail cost inflation, but well below the survey’s average. Economic expectations are all higher sequentially; some remain below the survey’s average while some are very positive indicators. With PSR cost-cutting, growth opportunities and the ability to capitalize on supply chain near-shoring, Kansas City Southern remains our top rail pick.”

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