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Second quarter headwinds temper expectations for rail

Image courtesy of Union Pacific

As the Class I railroads begin reporting their second quarter earnings results next week, some members of the Wall Street community expect the lower rail volumes from the second quarter to affect the railroads’ financial results.

“We believe volume, mix and continued weather challenges – particularly in the West – could be drags on results across the U.S. rails in the second quarter,” Morgan Stanley transportation equities analysts said in a July 8 research note. Year-to-date U.S. rail volumes are down 3.2 percent, according to the latest data compiled by the Association of American Railroads.

While flooding impacts in the Midwest in the second quarter could affect the earnings outlook for Union Pacific (NYSE: UNP), the drop in U.S. intermodal volumes could dampen the outlook for CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC). The uncertainty of whether the U.S. would place additional tariffs on China in the second quarter might have also had an impact on rail volumes in the second quarter, analysts said.

All these factors have led some Wall Street investment firms to lower their expectations for second quarter results. Susquehanna Financial Group lowered its earnings per share estimates for all the publicly traded Class I railroads except Canadian Pacifc (NYSE: CP).


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.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.