Transports with Most and Least Momentum: CP, UNP and EXPD sounded relatively best, and NSC relatively worst on Day 1.
This month’s Macro examines March and April data. As shown on Slide 8, freight vols on avg. declined 2% y/y in March and are tracking up less than 1% y/y based on preliminary April data after growing close to 3% the 1st two months of the year. Moreover, our proprietary Seasonal Freight Index (Slide 7) has dipped back below 50 the past 2 months after accelerating sharply late last year and early this year.
We emailed out a 70-page report reiterating our bullish TL thesis. We recommend buying TL stocks into early signs of tighter capacity and our expectations for capacity to tighten further the next few months and lead to stronger TL pricing into 2014. We also published a 60-page report on the rails and our expectation for stronger coal vols ahead. Bound hard copies of both reports will be available at our Global Transport Conference on Wednesday, May 22 and Thursday, May 23. If you can’t attend our conference, email us for hard copies of either report.
Natural gas prices have more than doubled over the past year and are currently trading back above $4.00/MBtu. Our conversations with coal-fired utilities indicate Powder River Basin (PRB) and Illinois Basin coals are now back in the money, and even Northern App (NAPP) coal is in the money for some plants. However, Central App (CAPP) coal will structurally remain uneconomic until gas rises closer to $6 for most plants. Based on higher gas prices, many utilities are reporting higher coal capacity factors versus a year ago. Utility coal stockpiles are also starting to come down, and coal production is ramping back up, and this should create a favorable backdrop for domestic rail coal volumes ahead.
Our 6th Annual Global Transport Conference will take place on Wednesday, May 22 and Thursday, May 23. This report is a guide for investors attending the conference, including a list of suggested questions to ask each company and a snapshot of our earnings models.
The USDA released its initial grain production and grain export forecasts for the upcoming 2013-14 crop year. Total corn, wheat and soybean (the 3 major crops moved by the rails) production is expected to increase 22% y/y after dropping 8% last year and 14% in total the past 3 years. The USDA also expects total exports for these 3 crops to increase 18% y/y, a major reversal from a 30%+ decline the past 2 years.
Nat. gas prices have spiked more than 30% to begin the year and closed around $4.40/MBtu. Our conversations with coal-fired utilities indicate PRB and Illinois Basin coals are now clearly in the money and Northern App (NAPP) coal is back in the money for many plants, although Central App (CAPP) coal will remain out of the money unless gas rises above $5 for some and closer to $6 for most plants.
Total rail vols were flat y/y vs. +1.6% and +2.9% and 1.0% in the past. Relative to recent trends, grain and metals vols have weakened the most, while intermodal vols have slowed. Coal vols remained negative y/y, but comps become easier the next few weeks. Intermodal vols were negative y/y for most of the rails due to weaker sequential vols.
CP reported clean 1Q EPS of C$1.24, vs. Cons. and our est. of C$1.21. Rev. EBIT and EPS grew 9%, 32% and 50% y/y, by far the best among the rails and materially accelerated from 4Q. Vols were a little light of our expectations, but yields and margins were much better.
CP reported 1Q EPS of C$1.24, vs. Cons. and our est. of C$1.21. CP didn’t highlight any one-time items but a larger other income drag was offset by a lower than expected tax rate, so we view 1Q as clean and slightly above Cons.