Matt Elkott: Inquiry uptick in an otherwise sluggish market

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Written by: William C. Vantuono, Editor-in-Chief
Cowen and Company recently hosted a roundtable conference call with four rail equipment experts. “An uptick in freight car inquiries has occurred for one builder but has not yet translated into increased orders,” notes analyst Matt Elkott.

The panelists “sounded slightly more optimistic about the industry outlook than they did before,” said Elkott. “However, the big runs in the stocks appear to suggest much more than a ‘slight’ improvement in outlook. As such, we are concerned earnings may act as reality checks, causing near-term pullbacks.”

Elkott said that the manufacturers on the panel noted a rise in the number of inquiries for new railcars in the past month and indicated that this activity level “was much better than his company had anticipated. This, however, has not yet translated into higher orders. The increased inquiries appear to be on a number of equipment types, including plastic pellets, intermodal, and autoracks.”

“The panelists noted that the potential implementation of protectionist trade policies in the U.S. could be detrimental to imports of cement and other building materials that have long been trucked to destination,” Elkott said. “If trade tariffs spur domestic production, demand for rail transportation, and consequently demand for hopper equipment, could benefit. A separate phenomenon, if it takes hold, could drive demand for flat cars and intermodal equipment. Producers of frac sand are trying to streamline their processes to reduce cost.

“One way to do this, as one panelist pointed out, is to reduce the cost of transportation through the use of unit trains and improving loading and unloading. Some producers are looking at moving frac sand in containers and taking it straight to the well, instead of having to load and unload a covered hopper and then transfer to a container out to the well. Demand for plastic pellets, which has been key for the industry in recent years, appears to remain strong. While an uptick in grain car orders did occur in response to a strong harvest, it was not quite to the extent that some may have hoped. Demand for aggregate hoppers could continue to be supported by anticipated infrastructure spending, but that is likely to be a gradual long-term event, and competition from trucking should be alive and well given many of the moves should be shorter haul.”

Elkott noted that Cowen “has held a relatively positive, largely non-consensus view of the industry for the past year, namely on our Outperform-rated TRN (Trinity) and GBX (Greenbrier). We continue to have favorable, long-term views of these two companies and believe there is more upside than downside, but the improvement in fundamentals, as we've long maintained, is likely to be slow and gradual. As such, the roughly 26% rise in railcar equities on average since Nov. 8 leaves us concerned about a potential near-term hiccup in the momentum of the stocks that could occur when the builders report earnings, providing a sort of a reality check against the big rally.”

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