GREETINGS!
It’s earnings eve for railroads and everyone was stirring (the pot– see below). Consensus calls for the rails to post a ~20%+ YOY EPS gain (consensus is always wrong on the low side – look for +25%+). That healthy-looking gain – compared to the S&P500 expectation of a ~6% increase - actually shows a wide range, most notably in Canada (CN expecting a big win, helped by comps, and CP, busy elsewhere, and enduring a strike at the end of the quarter looking flattish).
One unusual standout is NSC, where the Street over the past 90 days shaved 8% off their consensus estimate – to a ~+10% outlook – while the rest showed slight increases over the course of the quarter. The quarter will be marked by the public debut as CEO of CN’s Tracy Robinson. It will close., perhaps on May 6, with Berkshire Hathaway/BNSF. In between will be the Short Line Conference and immediately after the great NARS (North American Railroad Shipper event). That means two sojourns to Missouri in a week’s time, for my sins. See traffic, below….
First from the tweets on RRs and PR:
- Read the room, guys! With another STB Show Trial at the end of the month (April 26-27 - prediction: sound & fury/signifying meh?) RRs need to “read the room” – it is of course OK to renew your buyback (NS) but as part of a balanced capital plan (Capex for growth/safety); of course, it’s great to promote from within, but….perhaps don’t call PSR implementation “flawless”; maybe UP did it best in their plan to reduce cars online (maybe by metering)- stirring up a small hornet’s nest, but well explained in a letter by CMO Kenny Rocker (BNSF took similar actions in the west)….
- Still, adding in UP to the penalty box makes for bad news for the rails (and has led some intermodal observers to question their ability to handle the new business coming on from Swift this year and especially Schneider next….)
- The announced STB hearings - during earnings!! – came after urgings from the DoA and the constituent trade association, old friends NGFA – as well as both major operating unions
- Gone are the days of my late friend “Brokenrail” and making the pie bigger than arguing the size of the slice) – which doesn’t bode well for the ongoing labor negotiations
- The AFLCIO noted the “scourge of PSR” while singling out….BNSF
- The Canadian shippers and trade associations are joining the chorus – specifically lumber company Canfor going to 4-day weeks in BC due, they claim, rail capacity shortages
- At last, the STB (unanimously) approved CSX merger with the Pan Am Railway, extending their reach into New England and past Maine to St John; The STB also approved the portions involving NSC and GWRR in the “PAS” (Pan Am Southern) JV. Not much to extrapolate for the STB review of the CPKC (But that will be approved too – and we join the masses in looking forward to CPKC’s comments on the comments made by their rivals at the end of the week). BTW - Is anyone surprised that Chairman Oberman’s old stomping grounds, METRA, opposes CPKC (because – heavens! -it may bring more freight onto the network)?
- For the new rail map of New England, the critical question is will CSX exceed its strangely modest growth targets? They plan to spend a fair amount of capital – will they get a decent return? Some answers may come at the annual Short Line Conference at the beginning of next month – www.aslrra.org ).
- The Pan Am contains the so-called “Knowledge Corridor” running north from….New Haven; hopefully CSX will correct the most inappropriate name in US railroading. The “Patriot Corridor” on the PAS seems slightly more reasonable. Combined ops to begin ~June 1….
- As with the CPKC, the pledge of Capex and the benefits of single-line service were touted by the buyers (and apparently accepted by the regulators) which carries its own set of ironies….
- Good political news out of Mexico? Are there really checks & balances? Yes, and for the Mexican economic future and for (CP)KCS a good outcome at long last. The Mexican Congress rejected constitutional amendments to roll back energy reform and increase AMLO’s direct power over the energy markets and the economy overall. This action removes (some) deterrents to refined product transportation (formerly the hot rail market) as well as overall FDI (given the costs and environmental impact from the proposed government support of Pemex and CFE.
- In addition, the lower house vote had broad symbolic ramifications - local analysts called it a “huge defeat” for AMLO – so soon after “winning” his own initiated recall election in a 17% turnout - and state control of the economy and I call it a big win (along with the end of the Texas truck inspection fiasco at Laredo) for rail
- Barbie-by-rail? Mattel is building its biggest plant down Mexico way….
Traffic shows only small signs of inflection – but possibly critical ones. Service remains a problem and will be mightily discussed in the next few weeks. First the bad news. The AAR’s RTI reports that North American rail traffic fell 3.3% in March and almost 4% in Q1. In the month, carload traffic fell a tad (-0.1%) while Q2 was up a tad (+0.2%) – 8/20 commodities were up in March, 11/21 in Q1. The tri-country breakdown is as follows:
- USA totals for March and Q1 were both -3%; carloads were up 1% in the month (9/20 - boosted by dead-cat coal +5%) and +3% for the Q. Unfortunately, IM was down 6% and 7% respectively.
- Canada was the anchor, dropping 8% and 9% in March/Q1. It was pretty much across the board, with carloads -7%/-9% (7/20 & 5/20) respectively and IM down 9%/10%. Note that grain was down 34% in the month and 29% in the quarter….
And now for some good, or better, news:
- Mexico had a great March – total volumes up 14% (+5% Q1), with carloads up 16% (15/20) and 10% (14/20) respectively, while IM turned the corner, up 12% (it was down 1% for the full first quarter)
- IANA numbers show an important ray of hope – although March intermodal totals were down 5.5%, led (down by International (ISO) down 14%, Domestic was UP 3% led by Domestic Containers – the best and brightest hope for rail - up 6% (Trailers were down 16% despite the “driver shortage”).
- For the full quarter, the totals showed a 6.6% decline with ISO down almost 16% and Domestic up 3% (TOFC -13% but COFC +5%).
- JBHunt reports a blowout Q1 and sees blue skies ahead; BNSF plans a new Logistics Park near the Reds ballpark in Surprise AZ (suggests a March 2023 analyst visit)
- My good friend and RT presenter Larry Gross would argue with me about this, but I choose to see the domestic container news, amidst the rail service issues, the total supply chain (chassis shortages, warehouse workers, the ports - etc) issues, as a ray of spring sunshine. That’s my story and I am sticking with it!
Supply Chain –
“Any system designed for maximum efficiency doesn’t do well with disruptions” – Penn State/Harrisburg Professor Peter Swan at NEARS (who notably didn’t call out PSR as the cause of rail distress)
“Is this the end of 30 years of trade growth? Is it visible in the data? NO.”/FT (while noting that, due to the war in the Ukraine, the WTO reduced its 2022 global trade growth estimate by a full third to +3%)
“Reshoring is the trend that everyone is talking about but isn’t happening” (WSJ – see their 54-minute documentary on supply chains Why Global Supply Chains May Never Be the Same - A WSJ Documentary. Meanwhile, the IMF states that reshoring “is unlikely to fix supply chain woes”
Some (more) thoughts on supply chains and intermodal/railroads:
- Government intervention? The White House Council of Economic Advisors noted that the SC disruptions will last after the pandemic impact (which to me sounds pretty optimistic about the end of the pandemic impact). We have seen what the House is attempting to do to steamships and the spotlight they are bringing to bear on rails – but note – the Container Shipping index is down 16% YTD – on its own (“the cure for high prices is high prices”).
- JLL expects the net effect from this experience is that inventories will settle 10-15% higher – remember JIC will mean higher costs for rails (and the entire supply chain) but presents a very rail-centric opportunity!
- In light of the world seemingly splitting into several camps much like the Cold War (with concurrent dour outlooks for global trade – though NAFTA and USMCA, for example, were Cold War agnostic – I like Janet Yellen’s testimony called for “Friend-shoring”
Also:
- Evergreen’s not having a good pandemic, is it?
- But Walmart, whose leaders must have been pumped up by Starbucks coffee and their vente stakeholder capitalism, announced that its truck drivers are about to be having a good time – with salaries now set at $110K from $87K (the BLS reports that the average truck driver annual income is about $47K)
- CP really didn’t like that Transport Canada report on the sadly fatal 2019 derailment
- Within a week the WSJ reported on the Dow Theory (that a rising or falling DJTA means a follow-on impact on the DJIA due to transports being precursors to general growth) both on the way up and then on the way down (WSJ: “Trucking Boom Hits the Brakes”)
- Transport Topics report that Class 8 EV sell for 3X diesel – although fuel savings would reduce that somewhat….
- The temporary - that is the keyword here - E15 ethanol mandate won't be much help to rail – and in any event, remember that rails don’t necessarily benefit from increased ethanol production as much of the corn is short-haul trucked to plants
- Ag update: weather, weather, weather – late winter in the plains, drought persisting in the southwestern wheat belt (“worst days since the dust bowl”) with winter wheat rated mostly “poor” and rising/peaking fertilizer costs mean its hell on earth – but China has been back as a major corn buyer (Ukraine effect?) and US farmland values continue to set records
- Some issues that may drive inflation (random late-night musings whilst reflecting on the 8.5% US Q1 number):
- Labor shortages and the great resignation – which NYT’s Paul Krugman calls a myth, as HBO’s John Oliver also said of the Driver Shortage
- Fuel (a sign as well as a cause of inflation)
- Supply chain fluidity (impacted by labor, above, of course)
- Tariffs (~$370B on Chinese goods not hindering imports but raising consumer prices)
- Re-shoring – hasn’t happened but isn’t cheap_
- Resiliency/JIC (ditto)
- Reciprocal switching (adds costs and complexity – see fluidity)
- Freight analysts as “nerd celebrities” - The Pandemic’s Nerd Celebrities - The New York Times (nytimes.com) (I only resent the modifier)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18