Freight Fundamentals Across All Modes Are Strong: Cowen

HIGHLIGHTS


KANSAS CITY SOUTHERN: “KCS provided 2020 guidance including EPS flat y/y, which compares favorably to our forecast for EPS to decline -4%. However, KCS’s forecast calls for a lower tax rate than expected, which accounts for slightly more than half of the difference in expected EPS. OR Guidance of 60-61% compares favorably to our 61%, and FCF guidance of $500MM is above our estimate too. KCS has reduced headcount by 16%, with much of this coming from the U.S. as it can’t reduce headcount as much in Mexico. Growth opportunities include near-shoring of supply chains to Mexico, which is likely to increase. Mexico has structural advantages including lower wage rates, transportation costs, and time of transit from Mexico compared to China. Potential new business opportunities include multi-billion dollars of investment in new petrochemical plants in the Gulf, a paper plant being built in Monterrey, and new a facility for Stanley Black & Decker that was recently announced. KCS reiterated information around its 50-year concession from the Mexican government. Should there be a change in administration, KCS believes that its tax rate could go up 2-3%. KCS noted at the outset of its presentation that it would not be addressing any of the M&A rumors. After market close yesterday, a media report said that KCS rejected a $20B (or roughly $208 per share) offer from Blackstone and GIP.”

CSX: “CSX is benefiting from a strong intermodal recovery impacting both domestic and international intermodal volumes. On the domestic side, CSX began to see signs of life at the end of 2Q, with the economy starting to recover, people going back to work, and inventories needing replenishment. Since then, volumes have stayed strong, surprising CSX to the upside. On the international side, the recovery started more recently, with steamship lines trying to bring volumes into the country as quickly as possible. Management expects strength to continue into end of the year, but forecasting beyond that is easier said than done. Intermodal is currently in excess of 15% cheaper than trucking, presenting an opportunity for CSX to increase pricing when it renegotiates contracts in the coming months and next year. As CSX adds back volumes, it will likely come at high incremental margins, as CSX had ~30% additional capacity on existing train starts, pre-COVID-19.”

UNION PACIFIC: “UP reiterated its full-year and long-term guidance, and provided an update on volumes. Intermodal demand already at or near peak-season levels is a notable positive, with lumber also a bright spot, while certain bulk areas such as coal, sand, and crude remain significantly depressed. Management attributes the recent intermodal recovery to booming parcel and e-commerce business, with UP also seeing strong demand for restocking as retailers destocked during quarantine/shelter-in-place while supply chains were essentially shut. UP also added new shorter-haul traffic opportunities (in the 400-mile range) that they hadn’t historically operated in. Finally, though UP already has significant share of the cross-border traffic in Mexico, it believes that there is still a growth opportunity there. Longer-term, management said it is sticking to its 55% operating ratio (OR) target but noted that looking at OR is not always the best target to set.”

NORFOLK SOUTHERN: “NS volumes are close to pre-COVID-19 levels in merchandise. Intermodal and total volumes are now above, though coal is still well below. GTMs per T&E Employee are near all-time highs; even at their worst in 2Q, they were still well above pre-PSR levels. Additionally, train weights have increased 11% since 1Q19. NS is seeing the shift from the West Coast to the East Coast, which will be a tailwind in the long-term. However, NS is not abandoning volumes coming from the West Coast; it has new service from the Southwest to the Southeast, partnering with both UP and BNSF. 2021 capex will likely see a modest increase, with NS trying to minimize the magnitude of the increase. NS can envision a scenario where headcount in 3Q is lower than in 2Q, and management expects a y/y improvement in 3Q OR.”

The post Freight Fundamentals Across All Modes Are Strong: Cowen appeared first on Railway Age.

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