In this file:
· Freight Fundamentals Across All Modes Are Strong: Cowen
· COVID-19 Disruption Continues to Affect Freight, Rates
Freight Fundamentals Across All Modes Are Strong: Cowen
by William C. Vantuono, Railway Age
September 10, 2020
COWEN AND CO. GLOBAL TRANSPORTATION & SUSTAINABLE MOBILITY CONFERENCE TAKEAWAYS: “Railroads are focused on adding back traffic at high incremental margins, though rail network congestion persists,” Cowen and Co. analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer reported following presentations by several major carriers. “Freight fundamentals across all modes are strong, with retail and CPG (consumer packaged goods) restocking of inventories a major driver of the current spike in demand. Many customers are choosing to renegotiate TL (truckload) contracts early as spot rates just eclipsed 2018 peak levels and are likely headed higher.”
KANSAS CITY SOUTHERN: “KCS provided 2020 guidance including EPS flat y/y, which compares favorably to our forecast for EPS to decline -4%. However, KCS’s forecast calls for a lower tax rate than expected, which accounts for slightly more than half of the difference in expected EPS. OR Guidance of 60-61% compares favorably to our 61%, and FCF guidance of $500MM is above our estimate too. KCS has reduced headcount by 16%, with much of this coming from the U.S. as it can’t reduce headcount as much in Mexico. Growth opportunities include near-shoring of supply chains to Mexico, which is likely to increase. Mexico has structural advantages including lower wage rates, transportation costs, and time of transit from Mexico compared to China. Potential new business opportunities include multi-billion dollars of investment in new petrochemical plants in the Gulf, a paper plant being built in Monterrey, and new a facility for Stanley Black & Decker that was recently announced. KCS reiterated information around its 50-year concession from the Mexican government. Should there be a change in administration, KCS believes that its tax rate could go up 2-3%. KCS noted at the outset of its presentation that it would not be addressing any of the M&A rumors. After market close yesterday, a media report said that KCS rejected a $20B (or roughly $208 per share) offer from Blackstone and GIP.”
CN: “CN is seeing intermodal (both international and domestic) volumes recovering, along with continued strength in grain and lumber. In another indication that volumes are returning, CN recalled 2,000 T&E employees and brought back 500 locomotives and 1,500 railcars into service. However, some costs will likely remain out of the system on a permanent basis, including dispatch centers that were consolidated from three to one, some shops that remain closed, and fuel costs, with CN setting a fuel efficiency record in August, the fourth consecutive record (and best in the industry). We believe that the East Coast presents an underappreciated opportunity for CN. CN’s Eastern network is underutilized, and the Class I is using the Port of Prince Rupert as its model for building out the East. The Port of Halifax and the Port of Quebec are both undergoing significant expansions, and should aid CN in taking traffic from the Port of NY/NJ. However, with an average length of haul in domestic intermodal of 1,700 miles, it likely won’t see a volume increase with trucking spot rates spiking, but eventually will see a small benefit. Finally, CN is expecting a record grain crop in 2021, above the 77 million metric tons of the 2013-2014 crop season.”
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COVID-19 Disruption Continues to Affect Freight, Rates
by Deborah Lockridge, HDT Truckinginfo
September 10, 2020
Pent-up consumer demand from COVID-19 shutdowns continues to buoy spot freight rates, but a still-weak manufacturing sector has experts at FTR cautioning that things could turn downward again.
In a Sept. 10 FTR Engage virtual event, Vice President of Trucking Avery Vise and CEO Eric Starks shared their insights into current trucking and economic numbers and what they may mean in the coming months and into 2021.
The shutdowns caused by the pandemic starting in March caused “an immediate and severe contraction in just about everything” that lasted for four to six weeks, with a rebound starting in May as some states started reopening. Several months later, while there has been a major bounceback in a number of consumer metrics as people released pent-up demand, and spot freight rates are reflecting that, all is not rosy.
“There’s been a clear difference between the consumer and industrial sectors,” explained Vise. Financial help from the federal government, such as extra unemployment benefits, the PPP loans, the CARES Act, and stimulus checks, helped buoy the consumer sector.
“We have much more than fully recovered when you look at new home sales,” Vise said. “In retail, it does seem that the surge has peaked and we’re returning to a more normal environment.”
The industrial sector, however, is still significantly below where it was pre-pandemic. Industrial production and manufacturing are down 8% from February, and durable goods orders are down 6%. Consumer airplanes have taken a huge hit, and numbers are down less if you take those out, “but it’s still down, while consumer metrics are up.”
One of the biggest indicators of the disruption the supply chain has gone through due to Covid-19, Vise said, is the inventory-to-sales ratio...
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