Posts Tagged ‘Cowen and Company’

Class 1 3rd Quarter Financial Reports Are Due to be Released This Month; Improvements Expected

October 10, 2020

North America’s Class 1 railroads will begin issuing their third quarter financial reports later this month and one Wall Street firm has already begun adjusting its expectations of what those reports will show.

In an article posted on the website of Railway Age magazine, Cowen & Company said it now expects the railroads to report freight volume lossess when compared to third quarter 2019 figures, but those numbers are expected to be an improvement over what was reported in the second quarter of this year.

During the second quarter of 2020, Class 1 railroads reported a 20 percent freight volume decline when compared with the same period in 2019.

Cowen expects carload volumes to check in at a 13.5 percent decline over 2019 while intermodal volume is expected to be up 2 percent over last year.

In a note to investors, Cowen analysts noted that despite losing substantial levels of freight traffic this year due to a COVID-19 pandemic-induced economic downturn, the practice of precision scheduled railroading with its emphasis on cost cutting has enabled some Class 1 railroads to post some impressive operating ratio figures of below 65 percent.

The operating ratio reflects what percentage of revenue is spent on operating expenses.

Only Norfolk Southern had an OR above 65 percent. NS reported its OR in the second quarter was 70.7 percent.

NS expected to report an OR of 62.5 percent in the third quarter due to aggressive cost reduction efforts.

Cowen said that it remains to be seen if Class 1 railroads will be able to continue to restrain their expenses in future quarters and to what extent.

Panelists Upbeat About Class 1 Rail Traffic

September 12, 2020

Participants in an investor’s conference saw sunshine this week when discussing the state of  North American Class 1 railroads.

Speaking at the Cowen and Company Global Transportation & Sustainable Mobility Conference, analyst Jason Seidl said the railroads “are focused on adding back traffic at high incremental margins, though rail network congestion persists.”

Seidl, who is managing director at Cowen, along with fellow analysts Matt Elkott and Adam Kramer wrote in Railway Age that freight fundamentals across all modes are strong, with retail and consumer packaged goods restocking of inventories a major driver of the current spike in demand for intermodal business.

“Many customers are choosing to renegotiate TL (truckload) contracts early as spot rates just eclipsed 2018 peak levels and are likely headed higher,” they said.

Executives from Canadian National said traffic is moving back toward normal levels, driven by strong growth in intermodal, grain, lumber, and frac sand volume.

“We are clearly seeing a recovery happening,” Chief Financial Officer Ghislain Houle said.

CN’s domestic intermodal volume is up 30 percent while international intermodal gained 19 percent.

“Frankly, at this point we have good demand. I would say that we’re essentially not even moving everything that we could move,” Houle said. “We are calling back people. But this is a good story. This is a good problem to have.”

The Cowen analysts said CSX has benefited from a strong intermodal recovery in domestic and international intermodal volumes alike

Domestic intermodal traffic began rising at the end of the second quarter as the economy started to recover and employees returned to work.

That led to a need by retailers to replenish their inventories.

The Cowen analysts wrote that intermodal is currently in excess of 15 percent cheaper than trucking, which gives CSX an opportunity to increase pricing when renegotiating contracts in the coming months and next year.

At Norfolk Southern, traffic volumes are are close to pre-COVID-19 levels in merchandise while iIntermodal and total volumes are now above.

However, coal traffic remains well below pre-pandemic levels.

NS officials have reported seeing a shift in intermodal traffic from the West Coast to the East Coast, but is not giving up on West Coast traffic.

Capital spending for NS next year is expected to increase only modestly as the carrier tries to minimize the magnitude of the increase.

The Cowen analysts said NS is looking at reducing its workforce in the third quarter compared with the second quarter and a year over year improvement in the third quarter operating ratio.

Rail Shippers Not Optimistic for Short Term

April 14, 2020

A survey of railroad shippers found the number expected rail car orders is falling and business growth has come to a near halt.

The survey was conducted by Cowen and Company and the results published on the website of Railway Age.

The survey found mixed results when shippers were asked to estimate how many rail car they would order.

Although most respondents expect to order fewer cars, the percentage that plan to order more than 2,000 units increased to 10 percent from 3 percent in the fourth quarter.

That could reflect a small number of shippers taking advantage of possible price decreases during an economic downturn.

Shippers expect railroad freight rates to increase by 1.9 percent over the next six to 12 months.

Some shippers, though, expect railroads to cut pricing in the face of volume declines and the effects of the COVID-19 pandemic.

When asked if they believe there will be an economic recession in the next six months, 78 percent of respondents answered in the affirmative.

Shippers expect their businesses to barely expand during the next 12 months.

Just 10 percent of shippers are more confident in the economy now than they were three months ago when 54 percent expressed growing confidence in the economy.

The pandemic has affected 85 percent of those who responded and Cowen said had the survey been conducted a few days later the response like would have been higher.

The percentage of respondents that expect a return to normal in April was 1 percent while 10 percent think it will be May.

More likely, shippers believe a return to normal won’t happen until August or later.

Reports Show Challenges Facing Railroads

January 14, 2020

Investment banking firm Cowen and Company recently released three reports that reflect tough times for railroads yet contend that things are not catastrophic either.

The New York-based firm noted that in the fourth quarter of 2019 freight volumes fell by 7.5 percent when compared to the same period of 2018.

In comparing the last quarter of 2019 to the earlier quarters of the year, carloads fell by 1.4 percent, 4.8 percent and 4.4 percent by respective quarter for a full-year decline of 4.0 percent compared with 2018.

Cowen said railroads last year handled volumes that were similar to those expected during an economic recession.

It said, though, that the advent of precision scheduled railroading has enabled Class 1 railroads to reduce their expenses, which helped to stimulate earnings growth despite volume declines.

Among the long-term forces affecting railroads are intermodal growth, decline in export coal, and the state of the overall economy.

Cowen said these resulted in Class I railroads falling short of expectations.

It likewise has lowered its expectations for 2020 on earnings per share forecasts for most Class 1 railroads.

The exception is Kansas City Southern because Cowen analysts believe that carrier will benefit from the shifting of supply chains to South and Central Mexico.

In another study released by Cowen, a survey of rail shippers found they are expecting price increases of 3.0 percent below the survey’s long-term average.

Cowen described this as a positive for railroads but noted carriers continue to confront a challenging near-term demand environment and the worst volume declines since 2009.

The report said data show that railroads haven’t sought to increase their volume by lowering their freight rates.

The average positive rating given by shippers to rail service rose to 60 percent from 53 percent the third quarter of 2019 with satisfaction rising with all railroads other than Norfolk Southern.

In a third report, Cowen said railcar demand appears to be holding at or just below the levels of the past quarter despite rail traffic declines and the continued implementation of PSR.

Cowen said about 51 percent of all shippers surveyed said they will or may order railcars in the next 12 months.

That compares with 53 percent who said that during the third quarter survey.

About 49 percent of shippers said they do not plan to order railcars compared to 48 percent in the previous quarter survey.

Rail Shippers Expecting Rate Hikes

October 15, 2018

Rail shippers are expecting rate increases of 3.7 percent during the next year, Railway Age has reported.

A survey conducted by Cowen & Company found that shippers now expect the rate hike to be slightly lower than the 4.7 percent that they expected when surveyed in the second quarter of this year.

“Economic confidence and recent business trends remain above the survey’s long-term average. We view these results as neutral to slightly negative for the railroads,” said Cowen Managing Director Jason Seidl.

The survey found that among Class 1 railroads, BNSF had the highest favorable rating in terms of service. Shippers gave BNSF a 70 percent positive rating.

Seidl said the responses received in the survey were diverse but more negative than those given in the last quarter.

“Shippers expect their businesses to expand at an average rate of 2.9 percent in the next 12 months, the second consecutive quarter that shippers’ expectations have declined,” Seidl told Railway Age.

The shippers expressed more confidence in the direction of the economy but that was down sequentially but above the historical average.

Shippers also reported that business levels were less positive than in each of the past two quarters.

Railcar Survey Shows Mixed Picture

July 15, 2018

A recent survey of rail equipment needs produced a mixed picture that showed shippers are not ordering railcars due to uncertainty and their order sizes have gotten smaller.

But Cowen and Company said that the survey also found that the railcar demand in the next 12 months should be a “net neutral.”

Cowen analyst Matt Elkott said that the survey considered four metrics:  The percentage of shippers who will or may order railcars, the conviction level about ordering (the split between “yes” and “maybe”) among this group, the percentage of “same shippers” (which compares only the responses of shippers who participated in both first and second quarter surveys who will or may order railcars, the conviction level about ordering.

“Shippers expect to place smaller orders relative to our prior [survey],” Elkott said. “Among the shippers who said they don’t plan to order railcars in the next 12 months, the percentage who said it is because they don’t have incremental equipment needs increased.”

About 55 percent of the shippers “will” or “may” order railcars in the next 12 months.

Of these, 59 percent said they plan to place orders while 41 percent said “maybe” they will order.

About 45 percent say they do not plan to order railcars, a drop of 1 percent compared to the prior-quarter survey.

On a same-shipper basis, Elkott said the results look less encouraging.

About 47 percent said they will or may order railcars, compared to 68 percent in the previous survey.

Of these, 75 percent said they plan to place orders while 25 percent said “maybe.”