Greetings;
Surf’s up! It’s that strange early summer period for rails, not the dog days but the end of the endless CFOs-at-analyst conference period when message consistency outweighs revelation (“we’re not where we should be, of course, but we’re getting there!”) and given the tiny change in operating metrics (well noted by regulators and discussed at the NITL conference), both old and new, not much “news” to ponder. (UP’s CEO Lance Fritz said he saw a PEB coming on the labor front and that there was still hope for one-man crews). So, while alone in my room, I thought I would offer up more of an opinion piece….
Which led me to recall the story of perhaps the 21st century’s greatest rail success to date, the Canadian National, the “mothership”. Barely six months ago the coming proxy fight, subsequently dissolved, was what I called “the battle for the soul and the future of the North American Freight railroad industry”. And now I am wondering, based on very little evidence, why it seems as if the winner is acting like the loser….NOW I need to preface anything that follows by stating that it is WAY too early in the career of CN CEO Tracy Robinson, extremely well-regarded, to make any lasting conclusions about future strategy or performance. After all, Q2 will be her first full quarter in charge! Maybe I should heed the song – Don’t Worry, Baby!
But I’m picking up strange vibrations
It's giving me heart palpitations
Strange, strange – strange vibrations!
The Battle for the Railways’ Soul is, in this regard, my own concept – the fight for the future leadership of the industry as it played out most recently in 2021. When TCI laid out plans to change CN leadership and strategic direction, too (in the words of their acolytes if not them directly) “re-focus on margin overgrowth”, I viewed that as the counter-revolution of the Cult of the OR (sorry, Rick, I am talking that back). My thinking was:
- (Mid 21st C) Railroads should be run by tech-savvy marketing – 5 of the 7 Class Ones were (are) so led, and one of the exceptions is led by The Unicorn so should be exempt
- The next phase in the railroad story is/must be the Growth Pivot
- Nothing at all against Jim Vena the man, with a great, even historic, track record, but rather his CV (as COO) and how it was represented by his supporters (the “re-focus”); for all we know on the record he might be Unicorn 2!
- CN’s OR “gap” can also be explained in part by accounting – higher D&A for capacity expansion, the margin impact of non-rail growth-oriented (“feed the beast”) acquisitions, etc – and in large part, by mix (ie; intermodal)
- Although the CN network is ~2/3 Canadian, the move was (is) going entirely against the current political/regulatory opinion in the US (STB/House)
- CN’s initial response was, to me, disheartening – a meet-in-the-middle effort to drive a (one year!) cost/OR plan (57%) rather than a vigorous defense of the growth strategy. Such an effort might, just might, have met with success given the “growth Pivot” strategies announced by other PSR 2.0 carriers such as UNP and CSX (etc) even as the insurgency was supported by some analysts - giving those who believe that the rails are too short-term oriented/beholden to the Street(s) support for their rather out-of-date position….
Fun, Fun, Fun….And then CN “won” (negotiating a deal with TCI), and named a former marketer as CEO (and bringing the Rail Group numbers back to 5/7). All is right with my world – well, umm….except for current rail service levels (mostly in the US), an interventionist regulator, labor issues (hiring and national negotiations), etc, etc. Robinson publicly introduced herself briefly on the Q1/22 webcast (being only on property merely 60 days at that point), and all seems A-OK. But then I start getting some interesting questions over the transom about looking deeper into those (and subsequent) remarks, and those vibrations start a-happening:
- Talk of “curating” the book of business - worse, “re-balancing” it - begins to sound, upon reflection, like a knock on intermodal (see “mix”, above). After all, as I wrote about CN’s Q1/22 if you want to balance IM and Manifest growth – grow manifest faster. Or “Yield Up. Or….This coincided with a counter-revolutionary backlash against IM that bubbled up in analyst questions to the whole industry in April: “Is intermodal worth it?” To which the only answer is – it had better be!
- And that’s a sign that, while the Cult of the OR may be so very 2017, it ain’t dead yet. One analyst writes after a CN presentation “Sure enough CN isn’t taking as much intermodal business as it could, leaving room on the network for more profitable shipments”. CN didn’t say that – but I can say, that’s no plan for how business is moving in the future. And that’s the nicest thing I can say…
- The margin focus being espoused is what we would have expected had TCI won their proxy fight but I recall that they didn’t, they withdrew, so what gives?
- Of course, Robinson, the leadership team, and the Board have met with top shareholders over the entire process, and this may reflect their wishes….and
- Then last week CN was rewarded by at least two upgrades, including one (according to SeekingAlpha) that championed CN “returning to PSR principles (which) has the potential to deliver an OR between 53% and 54% versus the 61.2% reported last year”.
- ARGH!!! I don’t know where but that sent me there….
- The Mothership needs to “return”?
- Anyone remember ROIC??
- See above – it’s WAY TOO EARLY TO CONCLUDE ANYTHING. And remember, CN didn’t say that, an analyst did (just as TCI didn’t publicly state a refocus on margin and away from growth, although they let supporters and acolytes say it without correction)
- Maybe it’s the last gasp of the short-term thinking – for, despite what Chairman Marty thinks, rails investors lean toward the long term - that riles me so, not the company’s few comments
- If it is that last gasp of the S/T, then it’s got a certain irony (DC hating on PSR somewhat illogically; CN “returning to PSR principles)
- BUT
- So – who won the winter war, the battle for the soul, what have you, after all?? Perhaps CN will screw their courage to the sticking place and champion growth and ROIC and intermodal – wouldn’t that be nice?
Gotta keep those lovin’ growth vibrations a-happening…..
Also:
- CP seems to like intermodal just fine, picking off a CN customer CMA CGM
- Although that company may be, er, “distracted” – it bought a 9% share in Air France/KLM, following the moves of MSC. Now that is intermodal! The JoC reported air cargo into O’Hare grew by 47% since the pandemic began….
- Industrial REIT (read “warehouses”) shares are down 22% YTD mostly post AMZN earnings….
- Ships outside of LALB down to 30; Shanghai reopening….
- RailPulse deepened its relationship with the AAR’s data center RailInc….
- Pushback on ESG – Vanguard noted it would not stop investing in fossil fuel companies (rather it would “still engage with companies on climate change”) and activist Peltz took a stake in ESG pioneer/IM champ Unilever; meanwhile German authorities raided the Frankfort HQ of Deutsche Bank “over allegations they made unsupported claims about ESG investments” (WSJ)!
- The US grain commodities markets always react quickly and often emotionally to weather, but it is worth noting that only 49% of the US corn crop has been planted (the five-year average is 67%). Spring wheat plantings are at a record low (49% - the average is fully 83%). Also worth following is the situation in the Red River Valley (ND/MN) which is having weather issues – it’s the heart of the PNW export business/
- Meanwhile, a thought occurred to me while listening to the promise (hype?) of renewable fuels in the near (ish) future – will new crush plants in the RRV, etc mean diverting long-haul rail to short-haul truck as we saw a lot with ethanol?
- Consultants Sentieo noted in the FT that phrasing around “near/re/on shoring” on earnings calls and company webcasts YTD had reached “the highest level since 2005”….which to me doesn’t sound like a lot since 2005 might well be the very apex of (traditional) globalization. I mean who talked about re-shoring in 2005??
- Meanwhile, I am off to Be True to My School (reunion)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18