Yesterday (02/18/20), WAB reported 4Q EPS slightly below Consensus, provided C20 cash EPS guidance largely in line with expectations, and gave C20 cash flow guidance well below our expectations. The 2020 guidance has been an overhang on the stock given big declines in rail locomotive deliveries this year, and with the guide now behind us, the stock rallied 4%.
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The STB released January headcount data for the rails (U.S. operations only) yesterday. Total headcount declined 12% y/y in January vs. -11% each of the prior 2 months. This is the largest y/y decline in the history of our data series (back to 2001). Total headcount also fell 2.4% m/m in January, the 14th straight sequential monthly reduction. Headcount on average for the Big 3 US rails declined 14% y/y, while volumes fell 6% y/y on average, implying the best labor productivity in the past 13 months.
WAB reported GAAP 4Q EPS of $0.71 but adjusted earnings of $1.04 vs. Cons. of $1.06. On a cash basis, WAB reported 4Q EPS of $1.24, in line with our model as we already moved to cash EPS. Total sales beat our model by 6% (Freight 14% above our model but Transit 8% below), while adjusted operating margins of 15.3% were 100bp below our expectations.
Our WR Transport index fell 0.5% last week, underperforming the 1.6% rise in the S&P 500. The Integrators (FDX/UPS) outperformed last week (+2%), while the Forwarders (-3%) lagged the most.
We spoke with consumer products shipper about the potential impact of coronavirus on global air and ocean trends. Our contact noted that production in China isn't close to normal levels yet with many people not yet back at work. Additionally, there are a lot of logistical challenges in China with local trucking for loading and conveying. So while there have been some blank ocean sailings, our contact has not seen backlogs of freight in China build up yet. But this shipper believes the situation will change very quickly and expects the biggest issues with finding airfreight capacity. Capacity right now is essentially limited to freighters as passenger airlines have effectively cut almost all their flights. As a result, inbound rates to China are already tracking up ~50% from normal levels. Outbound rates haven't spiked yet given factory delays, but once production ramps, our contact believes airfreight rates out of China could spike to 2x-3x previous levels.
Yesterday (2/11/20), a U.S. District Court judge in Texas ruled in favor of the rails and issued a permanent injunction ordering the largest railway labor union (SMART-TD) to negotiate with the rails about train crew sizes. The rails kicked off the latest round of labor negotiations late last year including a proposal to move to one-person crews and redeploy conductors from locomotives to ground-based positions. However, the conductors’ union has refused to negotiate on this issue, and yesterday's ruling now forces the union to start negotiating on crew size.
Our WR Transport index rebounded 4.0% last week and outperformed the 3.2% rise in the S&P 500. We had some big moves last week, including double-digit increases for USX, HUBG, ODFL, SAIA, and AAWW. Overall, the LTL and TL stocks performed best last week, while the Truck OEMs performed worse.
Pasted below, please find our Friday Freight note. We distribute this product via email each Friday mid-day, so clients have some freight reading material to make their weekends truly worthwhile! Your feedback is always appreciated if you have any suggestions.
Our WR Transport index is up 0.3% YTD to start the year, slightly lagging the 0.6% rise in the S&P 500. 14 of our 32 companies are outperforming the S&P 500 YTD, with Rails generally performing best and Integrators and Truck OEMs performing worst.
Our WR Transport Index fell 3.3% last week, underperforming the 2.1% drop in the S&P 500. A combination of some challenging reports and spreading coronavirus fears were a rough combination as the Integrators (-8%), non-asset Forwarders (-6%) and LTLs (-5%) each badly underperformed. Meanwhile, the rails were down just slightly and continued to relatively outperform.
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