We spoke with a private TL carrier about recent demand and pricing trends. This carrier noted that demand has been better than seasonally normal so far this quarter, with a 20% increase y/y in tenders. As a result, our contact has been able to increase utilization about 2% y/y so far in 2Q despite also growing his fleet 6% YTD. That said, pricing remains under pressure and is still down over 1% y/y. Our contact added that he's not seeing driver pressures and expects to grow his fleet another 4% the rest of the year. Looking ahead, this carrier believes TL capacities will tighten by 4Q due to a combination of normal seasonality, ramping oil activity, and the initial impact of ELDs. This should lead to strong rate increases over 5%-10% next year with shippers that have been most aggressively trying to get lower rates over the past two years; and more modest 2%-5% increases with customers with long relationships that have been more reasonable over the past year.
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Wolfe Research Senior Transportation Analyst, Scott Group; and Senior Airline and A&D Analyst, Hunter Keay, hosted a webcast discussing takeaways from the 10th Annual Global Transport Conference.
Our WR Transport Index fell 0.8% last week and it inflected into negative territory for the year (down 0.2% YTD). LTL stocks rebounded nearly 3% last week as oil prices bounced, but the LTLs are still the worst performing freight sub-sector YTD. The U.S. rail stocks were worst last week despite upbeat comments at conferences. We think the U.S. rails were one of the best ways in the whole market to play tax reform (all U.S. earnings, cash tax payers, and pricing power), and the likelihood of tax reform surely feels lower after last week.
Updates from the Rails in Boston/Canada went mostly as we expected. CP sounded best about trends relative to its expectations, although they noted a couple of derailments last week that could impact costs in the quarter. CSX sounds like a whole new railroad and reiterated full-year EPS guidance despite volumes tracking a little light of our expectations. NSC sounded good about volume, pricing and productivity, and UNP sounded good on volumes and productivity right now, but continued to sound cautious on pricing. And KSU sounded mostly positive on volumes other than intermodal which remain negative. KSU also noted that mix and yields are tracking positive, but mgmt didn’t give a revenue update. We continue to see upside to 2Q EPS for all of the rails other than KSU.
Last week, we surveyed ~110 investors to measure sentiment on the transports, favorite transport sub-sectors, top long and short ideas, and transport pricing/volume expectations. Our big takeaway from the survey is that there’s a lack of conviction in the group right now. Click here for the full note with all of the results, and thanks for filling out our survey, if you did.
We’re updating our rail estimates about halfway through 2Q. Volumes have been mixed relative to our expectations, and fuel prices have come down since our last rail updates. We’ve raised our 2Q EPS the most for CP and reduced our 2Q EPS the most for UNP. Our 2Q Rail estimates are above Cons. for all of the rails except for KSU, and we’re now at least 5% above Cons. for CP, CNI and NSC. Overall, we expect an upbeat tone from the rails at our conference.
We spoke with a large retail shipper about TL pricing and capacity trends. This shipper isn’t having any problems finding TL capacity right now, and carriers have been complaining to him that freight demand has been weaker than expected again this year. Our contact just completed his annual TL bid, and his TL rates ranged from flat to down about 1% y/y. He believes he could have lowered his rates more materially if he turned over his carrier base, but he wasn’t willing to do so and jeopardize longstanding relationships. This shipper has traditionally used very little truck brokerage capacity, but he’s added a little broker capacity this year to get a better feel for changes in the market. Our contact believes ELDs could help balance the TL market, but he isn’t worried about capacity getting tight as he thinks retail demand will remain weak for a while.
Our 10th Annual Global Transport Conference takes place next Tues. and Wed. (5/23-5/24) in NYC, and we have 60 companies scheduled to present and/or host 1x1 meetings. This report is a guide for investors attending the conference, including top issues & themes we expect to discuss, and a list of questions to ask each company.
Yesterday (5/16/17), the Canadian Minister of Transport introduced the Transportation Modernization Act which includes several proposed safety and regulatory changes for CNI and CP (and passenger airlines). Both Canadian rails believe this legislation will be signed into law this year and we view the bill as a modest negative for both rails.
The STB released April headcount data for the U.S. rails today (5/16/2017). Total rail headcount was down 2.6% y/y in April vs. -2.9% and -3.5% prior 2 months. This is the relatively smallest y/y decline in rail headcount in the past 18 months. Total headcount was essentially flat sequentially in April (-0.1%) after increasing slightly the prior 2 months.
Our WR Transport Index fell 2.0% last week, underperforming the S&P 500 which was down 0.3%. TL (-5%) and LTL (-5%) stocks were both worst last week, while the Rails (flat) were relatively best. Our average stock is now up just 0.6% YTD and underperforming the S&P 500 by over 600bp. In case you missed it, we hosted a conference call last week recapping 1Q earnings, discussing recent freight volume and pricing trends, and reviewing our latest shipper survey results. The message is that we’re not too positive on transports overall right now as valuations remain high and we don’t see a lot of upside to estimates after 2Q once volume comps start to get a lot tougher. Our favorite stocks are CSX and FDX, followed by UNP, GWR and SAIA. Click here for replay; Click here for the slides.
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