Second quarter headwinds temper expectations for rail

The second quarter of 2019 “was the deepest quarter of demand disappointment against our rail volume expectations that we can recall, at least since 2016. While intermodal weakness led, demand downside was surprisingly broad-based across commodities and rails (in-line CP the notable exception),” said Bascome Majors, the group’s transportation analyst.

Despite lowered volume expectations, some Wall Street analysts anticipate that service metrics that have improved as a result of precision scheduled railroading (PSR) could help support rail volumes in the second half of the year. PSR is an operating model that stresses streamlining operations, and as a result, dwell times have fallen and velocity has largely improved for the railroads that deploy it.

Volume declines in the second quarter were also seen across the transportation modes, and so volumes could grow in the second half of the year, provided that seasonal patterns hold, analysts said. 

“While there are some signs of hope in the data and expectations” for a rebound in the second half of the year, “we do not expect the damage in the first half of the year to be undone,” Morgan Stanley’s analysts said. Morgan Stanley lowered its fiscal year estimates for many of the transportation companies. 

While investment analysts have looked at trimming their outlook for the Class I railroads, shippers appear to be holding onto their expectations for how many railcar orders they expect to order in the next 12 months. With railcar demand appearing to hold steady, Cowen analyst Matt Elkott said rail equipment companies such as Wabtec (NYSE: WAB), Trinity Industries (NYSE: TRN), Greenbrier (NYSE: GBX) and GATX (NYSE: GATX) should be “well positioned longer term” despite the current economic uncertainty.