Greetings;
It’s earnings time again! The quarter that begins tomorrow (Thursday morning) with UNP (then CSX then next week) will prove to be, from the point of view of why we look at quarterly results (or why we should, anyway), rather meaningless. After all, we have continued to have the labor shortage (improving), the somewhat related strike fear, etc…
The rails will beat the market (S&P500) performance again – mid-to-high teens EPS growth versus low single digits. But, again, it’s the commentary that matters not the numbers. The best reports will come from Canada and (via CP) Mexico. The key questions:
- Service recovery trend lines appear to be improving – is that sustainable?
- Absolutely intertwined is the labor issue – hiring/training and attrition
- We are not likely to hear about the ratification process and the BMWE
- Also unlikely to hear until after ratification any commentary on whether compensation accruals were sufficient
- Unlikely to hear anything more on the CPKC (aside from CPKC) after the hearings – the negations have all gone inside
- After a throwaway OR question will be the customer-crystal ball one – how is the economy doing? At SWARS I thought I detected a backing off on the heretofore Class One consensus “the demand is there for us to fill” mantra, especially by CSX
- I am still trying to figure out the nature of “pent-up demand” – business not moved by competitive mode during the rail service struggles – as CSX pointed out the 30K autos on lots, etc. Is it on the order of 1% of carload volumes, offering rails some downside protection?
- Can rails continue to price at “rail Inflation Plus” even at this level of inflation and under such (STB etc) scrutiny? (A: yes).
- We’ll say hello! to Joe Hinrichs of CSX, although Big Jim Foote will still be on the call
- And the two big questions IMHO:
- 1. If it is a recession that’s immediately ahead of us – how will the rails handle it? Furloughs in the face of STB hearings and 18 months of crew shortages, or a move at least towards JIC? Can rails control their S/T investors who will ask about cost-cutting?
- 2. Assuming a smart answer to #1, how can rails pull themselves out of this death spiral of publicity? Some of this, to be sure, is their own doing but the entire supply chain (world/economy) felt a labor shock, yet only rails seem to get called on the carpet so much. The T&E shortage was never really more than 1500 folks (if well-placed).
- A “Guest Editorial” in the NYT discussed bad rail management, PSR and “monster trains” (or more volume per crew start in a labor shortage) – and on advocating nationalization (!!!!) compared the US rail system unfavorably to – seriously – China’s and Russia’s.
- I think with discretion being the better part of valor, we (OK, me) should abandon the phrase “PSR”, even if it worked so well in Canada (and….here). Even if it was brought to the US because service metrics had flatlined. Even if by January 2020 they had improved dramatically. The PSR 2.0 “Pivot to Growth” is simply not believed – only by accomplishing a change can we stop popular/government/regulator opinion from simplistically blaming rails for all woes from higher logistics costs to the Dodgers’ inexplicable loss to….I cannot even write it.
North American traffic sputtered in September (AAR/RTI ) particularly in the US, impacted to an unknown degree by the strike-fear impact. North American carloads dropped about a percent (8/20 showed increases), while intermodal was down 2.4% (see IANA, below). US carloads, down YOY by 1.1%, were, as RTI points out, some 7% below 2019 levels. Only 6/20 commodities were up….For the Q3, they showed a slight increase – do not forget the comparisons – and the grouping of “Industrial Products’ was flattish in the month and Quarter.
- But Canada was strong (carloads up 2; 9/20, IM up 3%) as grain – remember the comparisons – was up 29%
- Mexico was inexplicably strong, with carloads up 23% - 15/20 – and IM +20%
- Everyone sees recession everywhere, like a UFO at Burning Man – Global Port Tracker expects a 4% decline in inbound TEUs in H2/22, for example, and the NRF threw in the towel on the peak season (maybe there never will be one again as shippers mover quicker combined with JIC?); and heck, China didn’t even publish stats at its big Party party. But:
- JBHT beat estimates again, led by intermodal, and expects improving operations - and sees a true volume trendline at JBI of ~4%
- September IANA numbers show an overall 2% decline (vs. -4% YTD), but a strange reversal of trend to a CSX-like stronger international (plus 1.2%) with weaker domestic containers (-2% 0 likely strike affected)
- Warehouse vacancy in NA remains tight at 3.2%, lower than the YTD 3.8%, according to Cushman & Wakefield -m in SoCal it’s 0.7%!
- But to put that in perspective, the ATA truck tonnage number for September was +5.5% YOY; tons, not units but, still….
And:
- Lest you think we only care about the big guys, here’s a great podcast American Short Line and Regional Railroad President Assesses Short Line Railroad Market - Logistics Management (logisticsmgmt.com) from Logistics Management’s Jeff Berman and Chuck Baker, CEO of the American Short Line and Regional Railroad Association. Chuck will be speaking at RailTrends of course, as will a full chort line CCO panel and our Innovator of the year, Rick Webb of Watco.
- Remember 2017? Peak AV fear – now Bloomberg (BW) reports “Self-Driving Cars are going Nowhere) and the Times has called out not only AV (“As driverless technology has faltered, so has faith in such technology”) as well as the always silly Hyperloop
- Remember the ecommerce tidal wave? Well, it wasn’t – growth rates reverted back to pre-pandemic – still gaining share from stores but at a single-digit pace
- The WSJ special section on how to invest for the next 10 years had 6 stock recommendations – one was CP by Rose Advisors. Now the bad news – it was all OR-based…..
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18