We spoke with a large retail shipper about current TL pricing and capacity trends. The shipper has seen TL capacity loosen as his primary carrier tender acceptance rates improved to 95%-97% in 4Q and so far in early ’19, improved from around 85% last July/August, and a low of 70%-75% last June. As a result, spot rates have now fallen below contractual rates, although our contact is hardly using the spot market given elevated tender acceptance levels. Given looser capacity, this shipper now expects his contractual TL rates will be flat to down this year after a 10% increase last year. Note that this shipper’s bid takes place in the middle of the year, so the timing of last year’s bid was particularly tough. This shipper is also preparing an Intermodal bid and currently expects a 1%-2% price increase. While our contact normally reduces his Intermodal usage by 50bp-100bp as TL capacity loosens, he is not planning to make any changes this year since he expects improved y/y rail service and drayage availability. Our contact does expect to shift some TL business from for-hire carriers to its own private fleet as the driver market has loosened. Lastly, from a demand perspective, the shipper expects his transportation volumes to increase 5% this year, similar to C18. He’s closely watching the government shutdown, but has not seen any impact on his transportation volumes so far.
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Nice rally to start the year! Our WR Transport index bounced 5.7% last week and outperformed the 2.5% rise in the S&P 500. Just a couple of weeks into the year and our Transport index is already up 7% YTD and outperforming the 4% rise in the S&P. Overall, the TLs (+10%) and Rails (+8%) have performed best to start the year while the non-asset Forwarders (+1%) have relatively lagged.
We spoke with a large chemicals shipper about current TL pricing and capacity trends. The shipper has seen the TL market loosen meaningfully as his tender acceptance rates improved 14 percentage points sequentially last quarter to their highest level since 2H:17. This shipper also noted that spot rates have fallen below contractual rates but he's hardly using the spot market right now since tender acceptance levels are so high. From a pricing standpoint, this shipper's TL rates increased 6% last year and he's currently forecasting a range of flat to +5% for rates this year. Unless the economy re-accelerates, our contact expects rates will be closer to flattish or up slightly. Meanwhile, our contact expects around 2% LTL rate increases this year, down slightly from 2.5%-3% increases last year.
After the close (01/09/19, UNP filed an 8-K and noted that C18 margins finished better than expected, driven by stronger than expected volumes in December, lower fuel prices, and better underlying cost performance. Based on our model, UNP’s update implies a 61.7% OR in 4Q:18E, 90bp improved y/y and 100bp better than our prior expectation. Based on unchanged revenue expectations, we’ve raised our 4Q EPS estimate from $2.03 to $2.09 vs. prior Cons. of $2.03.
After the market (1/7/2019), UNP named Jim Vena as its new Chief Operating Officer, effective Jan. 14. Jim previously spent 40 years at CNI, most recently as COO before retiring in June 2016. Jim will lead the implementation of precision railroading (PSR) at UNP. The stock has traded up around 6% after-hours, and we’d be buyers, even after this strength, as we believe this move significantly increases the probability of PSR success and a mid-50s OR at UNP.
Volatility has continued to start the year, but thanks to a strong rally on Friday, our WR Transport index is up 0.9% the first few trading days of the year, basically in line with the 1% increase in the S&P 500. We’re definitely seeing a little mean reversion as the 4 worst performing stocks last year – YRCW, USX, R and KNX – are the top 4 performing stocks just a few days into the year. Overall, the TLs (+3%) have performed best to start the year while the non-asset Forwarders (-2%) have performed worst.
We spoke with a chemicals shipper about recent trends in demand, rail pricing, and service with the Class I rails. Business overall is steady and rail volumes increased slightly last year. Looking to 2019, our contact rail volume growth to accelerate to 4%-5% based on further development of the petrochemical and plastics industries around the Gulf. From a rail service standpoint, our contact is seeing improved line-haul service on UNP and NSC as they implement precision railroading, but local first- and last-mile service is worsening. UNP and NSC have also become more restrictive on the number of cars that they are willing to accept in their yards. Looking ahead, our contact expects both UNP and NSC to reduce crews, park equipment, and consolidate yards. But the changes made by UNP and NSC so far have been more gradual and less painful than the PSR roll-out at CSX in 2017. In terms of rail pricing, our contact is seeing 4%-6% rate increases on average from most of the rails, with the exception of BNSF which has more aggressively been chasing freight with competitive rates. However, almost 70% of the traffic for this shipper is captive, so there are only limited opportunities to shift freight from UNP to BNSF.
Our WR Transport has badly underperformed since the market highs in late Sept. (-26% vs. the S&P 500 down 16%) as freight volume growth has started to slow and trucking capacity continues to normalize. We expect freight volume comps will be increasingly challenged in 1H:19, which we expect will lead to slower pricing for most transports in 2H:19 and into C20. While the stocks have already underperformed and valuations appear increasingly attractive, downward EPS revisions haven’t even begun yet. So it seems too soon to paint a constructive view on transport stocks for the first half of the year.
Based on a strong finish to the year, volumes finished above our expectations for most of the rails in 4Q (ex-KSU), although mix headwinds appear worse than expected for some of the rails. As a result, we expect mostly in-line 4Q reports, other than CP where we expect a strong beat, driven by positive mix, strong operating leverage, and higher real estate gains. Among the other rails, we’re slightly below Cons. for CSX and KSU, and more in line for the rest.
Following 2 straight years of material outperformance, our WR Transport index fell 15% in C18 and underperformed the S&P 500 by over 900bp thanks to a terrible December when our group fell 16%. Despite the benefits of tax reform, strong freight volumes for most of the year and record TL pricing gains, our group underperformed badly on “peak cycle” fears as TL spot rates inflected negative and freight volumes started to slow.
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