Our WR Transport Index rose 2.2% last week, slightly outperforming the 1.8% rise in the S&P 500 and materially outperforming the 1.4% drop in the XLI. The LTLs (+7%), TLs (+4%) and Forwarders (+3%) each nicely outperformed last week, while the Rails (-1%) continued to lag with the each of the U.S. rails and KSU down on the week. After last week’s move, our Transport Index has inflected back positive and is now up 1.8% YTD, outperforming the 1.4% drop in the S&P 500 and the 16.5% drop in the XLI. The LTLs (+33%) and TLs (+16%) continue to outperform materially YTD, while the Rails (-5%) are now the worst-performing transport sub-sector YTD.
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We spoke with a private flatbed TL carrier about recent pricing and profitability trends. This carrier felt significant rate pressure in April and the first half of May as his spot market exposure roughly doubled from 20% of freight to about 40% of freight. Rate per mile bottomed in mid-May after falling about 7% from peak to trough, and is now back above pre-COVID levels. From a contract standpoint, this carrier reduced rates about 5% with a few shippers in April and May, but our contact expects to approach these customers before year-end to get that pricing back. Meanwhile, this carrier’s utilization (miles/tractor) was only down slightly in the downturn as this carrier's diverse customer base helped insulate it from significant lost volumes.
Rail stocks continue to lag with our Rail index now down 6% YTD (U.S. rails down 9%) vs. the S&P 500 down 2% and our WR Transport Index up 1%. We think this reflects a combination of 1) weak fundamentals and near-term earnings risk, 2) normal cycle behavior where truckers outperform materially at the bottom of the cycle, and 3) growing concern about a Democratic clean sweep and potential for higher corporate tax rates, further pressure on coal, and a tougher path to one-man crews. Our note today focuses on the fundamental issues for rails right now and why we think 2Q should be the bottom.
Since bottoming in mid- to late April, freight volumes have rebounded nicely off the bottom with rail volumes up 12%, intermodal volumes back above pre-COVID levels, TL spot rates up more than 60%, and LTL volumes likely up more than 10%. In addition, we expect y/y fuel tailwinds for most asset-based transports in 2Q along with strong cost performance with aggressive cost cuts, lower healthcare costs and lower road congestion for truckers. So we expect 19 beats vs. just 9 misses in 2Q, with the most potential upside for TLs, LTLs and Intermodal, and the most potential risk for the Rails and Truck OEMs.
Rail volumes finished 2Q better than we expected and actual reported rail volumes will likely come in slightly better than the weekly AAR data. However, the rails still faced the largest y/y volume declines among all transport modes, and we forecast negative mix for pretty much all of the rails in 2Q, so we expect more misses than beats in 2Q. Our updated 2Q EPS estimates are well above Cons. for CP, slightly above for CNI, and most below Cons. for NSC, KSU and CSX.
Today, we share a few final thoughts after FDX’s report and discuss why we continue to prefer FDX over UPS. We also discuss what this could mean for the rails. We also discuss the YRCW news and implications for the other LTLs, and recap the latest freight data we’re seeing. Open the full report for more details…
This weekly report presents the most recent views we are hearing from industry insiders and summarizes the research of Wolfe Research.
After shipper volume expectations inflected sharply negative last quarter amid the COVID pandemic, volume expectations turned back positive this quarter. Further, 44% of shippers cited lower y/y inventory levels right now, the highest level since 2010. So it seems like we’re setting up for a potential inventory re-stocking cycle.
Our WR Transport Index fell 2.1% last week, relatively outperforming the 2.9% drop in the S&P 500 and the 4.5% decline in the XLI. The TLs (up less than 1%) nicely outperformed on continued strong TL spot data, while the Integrators (-3%) and LTLs (-3%) both underperformed. The Rails (-1%) relatively outperformed within the group, led by KSU which was up 1% last week and best among the rails despite clearly talking down 2Q EPS estimates. Meanwhile, the U.S. rails relatively underperformed the non-U.S. rails again last week as the market seems to have started discounting the potential for higher corporate tax rates if Biden wins the election. CP, KSU and CNI are now each outperforming the S&P 500 YTD, while CSX, UNP and NSC are now each underperforming.
KSU rallied ~3% intra-day yesterday (06/23/20) after a Bloomberg headline cited an online blog speculating KSU was a potential takeout candidate. We don’t view the news as credible, but we received a bunch of questions from investors about merger rules for the rails, so our note today addresses some high-level thoughts on rail M&A.
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