We spoke with a large international auto manufacturer about current business trends including the impact of Hurricanes Harvey and Irma. Our contact expects weaker sales in September due to flooding in impacted areas of Texas and Florida. However, our contact expects a pick-up in sales later in 2017 and into 2018 as a full assessment of the damage is completed by insurance companies. In terms of logistics, rail embargoes have been lifted in Texas and CSX should be reopening all of its lanes in Florida very soon. In addition, the vast majority of auto dealerships in hurricane-impacted areas are now open. Relatively low gasoline prices are still supporting higher demand for SUVs and light trucks over compact passenger vehicles, and our contact estimates that gas prices would need to rise over $1 per gallon in order to see a shift back to smaller cars. Moving to service levels at CSX, this OEM is still experiencing some issues, primarily related to autorack railcar availability.
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After the close (09-19-17), FDX reported F1Q adjusted EPS of $2.51 vs. our estimate of $2.87 and Cons. of $3.09. F1Q included an estimated $0.81 EPS drag from the TNT cyber-attack and Hurricane Harvey, much worse than the $0.38 we assumed in our model. Normalizing for these items, FDX would have reported $3.32 in F1Q vs. the $3.28 we previously estimated in F1Q before the cyber-attack. So underlying 1Q results were slightly better than we initially expected, with much better Express and LTL results, but worse Ground results and higher Corp. expense vs. our model.
After the close (09/18/17), FDX announced its Express and Ground list rate increases for 2018. This is a normal announcement from FDX every year around this time. FDX plans to raise its U.S. Express, Int’l Express and U.S. Ground rates by 4.9% starting on Jan. 1, 2018. We estimate around 70% compliance with FDX’s list rate increases historically. See Exhibits 1-2 below.
Our WR Transport Index increased 0.7% last week, underperforming the 1.6% rise in the S&P 500. It was a mixed week for the group with the large-cap Rails up 2.0%, but the TLs down 1.3% on average and the LTLs down 1.9% on average. We think the trucking stocks sold off a bit after rallying so much the prior week leading up to Hurricane Irma, which ended up not being as severe as some initial forecasts. So a bit of short-term profit taking. Within the group, UNP (+6%) was a notable outperformer last week while YRCW (-8%) and ARCB (-5.5%) were the worst performers last week.
The STB released August headcount data for the U.S. rails today (9/15/17). Total rail headcount declined 3.6% y/y in August vs. -3.4% and -2.5% the prior 2 months. Total headcount declined 0.1% sequentially from July to August, the 5th straight month of sequential declines.
We spoke with a building products shipper about the impact of Hurricanes Harvey and Irma. This shipper has two facilities in Texas and Louisiana that were impacted by Harvey, and he expects that rail service in the region will be fully restored and back to normal in a few days. This shipper doesn't have any facilities in Florida that were impacted by Irma, but CSX has embargoed all traffic into the region. He expects rail freight will begin moving into Florida by next week. Our contact hasn't quantified the upcoming demand increase in Texas and Florida following the hurricanes, but it should definitely help volumes later this year and into 2018. And business was already strong prior to the hurricanes, so this shipper expects his rail volumes to increase around 10% this year. In terms of pricing, this shipper’s rates with most of the rails have increased 4%-5% this year, in line with recent years.
Our WR Transport Index increased 1.0% last week, nicely outperforming the S&P 500 which fell 0.6%. So we’ve seen transport stocks materially outperform the past 2 weeks since Hurricane Harvey, and our Transport Index is now outperforming the S&P 500 on a YTD basis again (transports up 12% YTD vs. the S&P 500 up 10%).
Earlier today (9/7/17), SWFT announced that its stockholders approved its merger with Knight Transportation. Following today’s shareholder vote, SWFT expects the merger to close tomorrow, September 8. Accordingly, we are withdrawing coverage of SWFT. Recall that KNX and SWFT announced an all-stock merger on April 9. Under the terms of the deal, each SWFT share will convert into .72 shares of new Knight-Swift shares by means of a reverse stock split, and each KNX share will be exchanged 1 for 1 with the new Knight-Swift shares. The newly combined entity will trade under the ticker KNX. With our dropping of coverage, our previous SWFT estimates should no longer be relied upon. Click here for our note earlier this week on KNX including our pro-forma EPS estimates and review of its synergy targets.
We spoke with a large lumber and forest products shipper about the impact of Hurricane Harvey. This shipper has one facility located in south Texas that was shut down for three days. Given the extent of the flooding, our contact is pleased that rail operations were only down for about a week on both BNSF and UNP. This shipper did not transition any freight to trucks, so the impacted rail volumes are just delayed, not lost. Rail service overall is recovering around the Gulf, but wildfires out West and a fuel shortage around Dallas are causing further disruptions. Rail volumes prior to the hurricane disruptions were very good and tracking up roughly 7% YTD, and our contact noted particular strength in rail volumes to California because emissions regulations have made trucking in the state much more difficult. Looking ahead, our contact expects a gradual increase in traffic to the Gulf, but rebuilding efforts are not likely to pick up until 2018.
FDX will report F1Q EPS on 9/19, and this is a very tough quarter to preview as FDX hasn’t yet quantified the impacts of the cyber-attack on TNT, Hurricanes Harvey & Irma, or rising jet fuel prices. While FDX will quantify the impact of the cyber-attack and eventually the hurricanes, we don’t expect they’ll exclude these items from adjusted EPS. So we expect FDX will report a large F1Q miss, cut its full-year EPS guidance, and raise CapEx guidance for increased IT spending at TNT. But our visibility into the magnitude of these expected guidance changes is very low.
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