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.
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.
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.
WAB reported 1Q EPS $0.04 above Cons., although the quality of the report was below our expectations as WAB benefited by $0.06 from a lower than expected tax rate. Rev., EBIT, and EPS grew 6%, 10% and 18% y/y, each decelerated from 4Q as rev. growth slowed materially and same-store sales turned slightly negative y/y.
WAB reported clean 4Q EPS 2% above Cons. and it’s now beaten expectations for 12 straight qtrs. on continued solid rev. growth and margin improvement. While Transit vs. Freight mix is a potential headwind and we still expect Congress to delay the PTC mandate beyond 2015, WAB continues to execute extremely well. WAB is typically conservative with its guidance and we are raising our C13 EPS above guidance and prior Cons. by 3% to $5.90. WAB remains uniquely positioned to benefit from secular growth in global freight and passenger rail demand and we recommend adding to or building positions on pullbacks.
A year ago, we introduced our transportation valuation “black box” based on quantitative rankings of risk, reward and returns. This note compares each of our transport companies relative to each other and the S&P 500 based on 6 historical and projected metrics including: Rev. and EPS growth (i.e. reward), free cash flow and return on capital (i.e. returns), and balance sheet leverage and earnings cyclicality (i.e. risk). .
Total Week 50 rail vols were up 1.6% y/y, relatively improved from flattish the past 2 weeks and the best y/y growth for the rails in 13 weeks. Vols are still tracking down 0.7% QTD in 4Q vs. +1.7% in 3Q. Last week, we reduced our 4Q vol. expectations for the rails, and vols are now slightly above our reduced expectations with 2 weeks of data left in the qtr.
Total Week 50 rail vols were up 1.6% y/y, relatively improved from flattish the past 2 weeks and the best y/y growth for the rails in 13 weeks. Vols are still tracking down 0.7% QTD in 4Q vs. +1.7% in 3Q. Last week, we reduced our 4Q vol. expectations for the rails, and vols are now slightly above our reduced expectations with 2 weeks of data left in the qtr.
Total Week 49 rail vols were up 0.2% y/y, relatively improved from -0.8% and flattish the past 2 weeks. Vols are now tracking down 0.9% QTD in 4Q, down from +1.7% in 3Q and below our prior expectations for flattish vols in the qtr.
We are lowering our EPS estimates for the rails based on weaker than expected vols in 4Q and moderating y/y service metrics, offset partially by lower fuel. On avg. we’re lowering our 4Q EPS by 2% and we’re now 3% below Cons. Based on weakening export coal vols and pricing, we see the most EPS risk for the eastern rails in 4Q. After years of favoring rail stocks, we lowered our sector rating to Market Weight in Oct. based slowing overall rail pricing, weakening export coal vols and pricing, and ongoing structural utility coal headwinds for the eastern rails. CP remains our favorite stock based on its massive turnaround potential the next several years, as well as its high-end crude oil and low-end utility coal exposure.