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This weekly report presents the most recent views we are hearing from industry insiders and summarizes the research of Wolfe Trahan. Included are (1) key takeaways, selected shipper comments; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight & logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On-highway diesel, Rail diesel, and Jet fuel.
On Wednesday, AMR pilot union leadership voted 11-5 to not send AMR’s “final” offer to its membership for a vote due to a lack of clarity on key issues. So, it briefly seemed that decision would clear the way for the bankruptcy court to abrogate their CBA (the judge was scheduled to rule on the matter today) but last night AMR and APA (the pilot union) asked the judge to delay his decision for another week – which he did. We think labor contract issues must be resolved before other matters can be addressed, as AMR’s bondholders need to know what type of labor contracts would be in place at a standalone AMR so they can compare them to the contracts that might be in place at a combined AMR/LCC. Pilots have incentive to approve a “less worse” contract than would be imposed on them by Section 1113, but voting for AMR’s final offer doesn’t necessarily mean labor has any less desire to merge with LCC. As such we expect a contract will be sent to the pilots for a vote next week and we see a reasonably high chance it will be ratified. We dive into this issue more deeply, as well as other related issues.
Earnings Quality Analysis. Our quarterly earnings quality (EQ) report, tool, and screen is used to identify potential accounting related short ideas and as a risk tool for investors to avoid potential underperforming stocks. We strongly believe that the balance sheet and cash flow statement are leading indicators of potential income statement problems and that management teams may mask deteriorating business fundamentals through various accounting maneuvers (e.g., cost capitalization, aggressively recognizing revenue, changing depreciation policies, etc.). For YTD 2012, the share price performance of our low earnings quality companies’ basket is -9.0% and -5.6% on a total and relative return basis.
Total Week 24 rail vols increased 2.3% y/y vs. +2.9% and -1.5% the prior 2 weeks. Vols ex-coal improved 5.2% y/y vs. +5.3% and +1.8% the past 2 weeks. Overall rail vols are now tracking up 0.7% QTD (vs. +1.0% in 1Q), relatively in line with our expectations.
News hit the tape that a federal judge ruled to certify a class action lawsuit against the major U.S. rails regarding their fuel surcharge programs. The suit, dating back to 2007, alleges that the rails illegally conspired to coordinate their fuel surcharge programs. The 4 major U.S. rails are named as defendants in the case, but not KSU, the Canadians or the short-lines. Based on similar fuel surcharge cases against LTLs, global air carriers and forwarders, we believe it’s very unlikely the rails face anywhere close to $30B of potential liability. Rather, we suspect a worst case scenario settlement or ruling (likely not for a couple of years) would have little impact on the rails’ balance sheets or pricing power. We also don’t see risk of rail fuel surcharges going away as the STB previously ruled fuel surcharges were a fair practice in 2007, when they required the rails to switch to mileage-based from rev. based fuel surcharges.
R pre-reported 2Q EPS of $0.90-$0.95 vs. prior Cons. of $1.10 and mgmt’s prior guidance of $1.07-$1.12. This excludes $0.10 of severance costs also announced yesterday. R also lowered and widened its full-year C12 guidance to $3.65-$3.85 vs. its prior range of $4.02-$4.12, prior Cons. of $4.09 and our prior est. of $4.05. Slowing CR trends is historically a bad sign for freight, but the relationship between R’s CR rev. and truck vols has broken down since 2010. Our sense from most truckers is that demand remains sluggish but seasonally normal, and pricing remains solid. Also, lower fuel prices in 2Q are negative for R but should be positive for asset-based transports this qtr.
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