Blanchard Railroad Week in Review, First Quarter 2020

The Railroad Week in Review:
First Quarter 2020

Week ending March 27
Texas shortline operator TNW Corporation has been awarded $4.4 million in two grants under the FRA's Consolidated Rail Infrastructure and Safety Improvements Program (CRISI) program; funds will go for infrastructure expansions to accommodate bigger trains moving faster. Pennsylvania’s Reading & Northern has won the Railway Age Regional Railroad of the Year award for the fourth time; the railroad was recognized for its multi-year project to construct a new bridge spanning the Lehigh River. The Coronavirus event is accelerating the process of simplifying supply chains; that railroad challenge is taking part in greater supply chain fluidity.

Week ending March 20
The stock market as a leading indicator of the general direction of the economy; how company guidance for earnings estimates has dropped markedly for the present quarter; why RR managers need to pay attention. How and why non-investment debt levels are increasing; why “adjusted ebitda” is a bad idea. Railinc January 2020 summary of non-Class I railroads; commodity comps.

Week ending March 13
The stock market as a leading indicator of the general direction of the economy; how company guidance for earnings estimates has dropped markedly for the present quarter; why RR managers need to pay attention. How and why non-investment debt levels are increasing; why “adjusted ebitda” is a bad idea. Railinc January 2020 summary of non-Class I railroads; commodity comps.

Week ending March 6
Why it’s important to follow the CBOE Volatility index and the Dow Jones Transportation index: the more volatile the market, the less stable the demand for freight services. Energy, Industrials, and Materials sectors showing varying degrees of weakness in fundamentals, values, and relative strength; examples would be risks to export pulp and paper thanks to offshore overstocks and a pullback in steel demand from demand from the auto, construction, and energy sectors. Tony Hatch on the transportation impact of the coronavirus. CSX cancels shortline meeting.

Week ending February 28
BNSF wraps up the earnings season with full-year revenue of $23.5 billion, a year-over-year decrease of $340 million, or one percent, on 2.2 million revenue units, down four percent. Five-year operating income comparison for the six North American Class I railroads -- table. UBS note saying John Deere ag sales are down; implications fir other ag-related commodities. UP’s Kenny Rocker cites new IANR intermodal terminal; IANR is the last-mile rail service provider, Watco runs the ramp, and Valor Victoria brings the customers.

Week ending February 21
How the four quadrants of the business cycle affect and predict railroad carloadings. Week 7 volume table; headcount reductions and NS shop closures are two results of negative traffic deltas. Railinc shortline and regional railroad commodity trends; chart.

Week ending February 14
Canadian National is shutting down significant parts of its Canadian network due to the blockades stemming from what the NY Times calls “an Indigenous group;” trains being parked. Canadian government imposing speed restrictions on hazmats; supply chain reliability and consistency endangered. Mexico finds there is a lack of “effective competition” for certain hazmats; impact on KCS Mexico minimal. AAR Freight Cars in Storage report.

Week ending February 7
Starting off with a seemingly unrelated quote but bear with me: It’ all about management focus as conveyed to investors. What do Apple and the railroad industry have in common? A core mission to create customers. What do they not have in common? A customer focus on earnings calls. BNSF announces $3.4 billion capex program for 2020, down 5% from the $3.6 billion investment made in 2019; For FY 2019, the railroad handled 10.7 million revenue units, down 4.5%. YTD volume comp.

Week ending January 31
Norfolk Southern did not have a good quarter commercially; revenue dropped seven percent to $2.7 billion on nine percent fewer revenue units and a two percent RPU gain. The Canadian National call was heavy on customer benefits and light on the usual ops and financial gleanings; operating income was down 16 percent to C$1.2 billion; the operating ratio added 415 basis points to a still-respectable 66 even. Canadian Pacific closed out the week with revenue of C$2 billion, up three percent, on 702,000 revenue units, down one percent, and RPU up four percent to C$2,883. Nobody’s raving about improved results in 1H2020 but they’re unanimous in saying life will return to normal in the back half.

Week ending January 24
Union Pacific and KC Southern report 4Q and FY results. Excellent PSR commentary by KCS; UP full-year results better than Q results, more representative of the railroad and carload commodities. Short lines say CSX ops getting better; commercial side needs to get more aggressive in the field.

Week ending January 17
CSX revenue units finished Q4 down nearly seven percent; merch carloads and revenue were down but three percent. CSX earnings presentation excerpt. Recent Wall Street sell-side discussion of what OEM sales portend for the trucking business; implications for railroads. Rod Case chart from RailTrends.

Week ending January 10
AAR North American revenue units finished Week 52 (December 28) down 4.0 percent -- every single carload commodity group was in the red except for “petroleum and petroleum products,” which, we all know, is driven by crude oil car counts. Short lines and regionals are still out there drumming up business. Examples. Are the Class Is cutting back on sales and marketing? Notes from the field suggest they are. Railroad share prices are drifting back toward “fair value;" four of the six Listed Class Is are trading at less than intrinsic value. Reading between the lines in the AAR motor vehicles category. Cautionary signs from the oil patch.

Week ending January 3
We’re off to the races for another year. Revenue unit volumes are still in a funk but the tea leaves suggests a turn for better in the second half. I’m particularly pleased to hear that so many short lines are finding new customers and increasing volumes from older customers. The common thread appears to be simply staying in touch and being true supply chain partners. This week we’re taking a close look at the shale drilling business and the role money has played in its development. We examine the stunning correlation between the Fed’s balance sheet and U.S. oil production, the explosion of high yield issuance in the sector, and the impending wall of maturity. This conversation goes a long way to explain the sudden drop in shale-drilling in the Permian and elsewhere.

THE BLANCHARD COMPANY
2041 Christian Street - Philadelphia PA 19146-1338 (215) 985-1110 voice - (215) 985-1446 fax
Roy Blanchard, rblanchard@rblanchard.com
Laura Blanchard, lblanchard@rblanchard.com