26 BARRON’S September 16, 2019
“You’ve got
to be careful
when the
market
is convinced
that revenue
doesn’t matter,
because
it very much
does for
cyclical stocks
like railroads.”
Barclays analyst
Brandon Oglenski
or STB, dozens of shippers complained about pen-
altychargesleviedbyrailroadsaspartofthepreci-
sion railroading makeover.
The railroads told the STB that the extra
charges are needed to deter a dawdling shipper
from holding up the network for everyone else.
Less than 20% of customers incur the charges,
both Union Pacific and Canadian National said.
WhiletheSTBisnotexpectedtostartsetting
prices, the railroads dare not let their prices be-
come a political issue.
A morepotentbrakeonrailratesisthecompeti-
tion of truckers. For the right kind of freight, rail-
roads are cheaper than trucks. There is plenty of
overlap,however.From2015to2018,contracttruck-
ing rates rose and provided cover for railroads to
raiserates,too.Thisyear,spottruckratesaredown
asmuchas20%,andcontractrateswillfollowsuit.
About a third of the freight carried by CSX is
the “intermodal” containerized cargo that can
travelbyrailortruck.Excesscapacityintherival
trucking industry contributed to an 11% drop in
the railroad’s June-quarter intermodal revenue.
CSXdeclinedtocomment,butitsCEOacknowl-
edgedthechallengesonthelatestconferencecall.
“Thereisaverysofttruckmarketoutthereright
now,”Footesaid.“It’salittlemoredifficultforus.”
The rollover of truck rates prompted Bernstein
analystDavidVernoninJunetolowerhisratingon
UnionPacifictoHoldfromBuy.Hefiguredthatrail
rateswouldfollowtruckratesdown,particularlyat
railwayswithalotoftruck-dependenttraffic,such
as intermodal cargo. Those include Norfolk South-
ern, CSX, Union Pacific, and Canadian National.
Norfolk Southern’s marketing chief Shaw is
confidentthathisrailwaycanholditsownagainst
the competition. “Over time, rail is going to have
an inherent cost advantage relative to trucking,”
hesays.“Asourservicebecomesmorereliable,we
will take share from trucks.”
If pricing may become a problem for railroads,
volumesalreadyare.Shippingvolumesturnednega-
tive this year, after two years of steady gains.
CanadianNationalsaysithasbeen“verynimble
inright-sizingitsassetstoalignwithvolumes”and
will continue to do so.
Still, rail volumes started deteriorating just as
investors became enthralled with precision rail-
roading,BarclaysanalystBrandonOglenskisays.
Investors, he adds, appear to have decided that
precision railroading’s efficiency gains will boost
marginsandgrowearningsevenifvolumesdecline.
AweekbeforeBernstein’sdowngrade,Oglenski
cutUnionPacificandthetransportationsectorto
anEqualWeightrating.ButhestilllikesCanadian
Pacific and CSX, rating them Overweight. By
warninginvestorsinJulyoftheweakoutlookfor
demand, CSX already took its lumps, the analyst
says.Heseesasimilarreckoningaheadforother
railroads.
“You’ve got to be careful when the market is
convinced that revenue doesn’t matter,” Oglenski
says,“becauseitverymuchdoesforcyclicalstocks
like railroads.”
55
60
65
70
75%
2015
Source: Company reports
Source: Bloomberg
Source: Bloomberg
YoY % change in truckload rates net of fuel surcharge
YoY % change in total car loads
2016 2017 2018 2Q19
As low as it
can go?Norfolk Southern Burlington Northern
Union Pacific
CSX
Canadian Pacific
Kansas City Southern
Canadian National
-15
-10
-5
0
5
10
15
20%
Oct
2017
Dec
2017
Feb
2018
Apr
2018
Jun
2018
Aug
2018
Oct
2018
Dec
2018
Feb
2019
Apr
2019
Jun
2019
Aug
2019
-10
-5
0
5
10
15%
9/08/1710/06/1711/03/1712/01/1712/29/171/26/182/23/183/23/184/20/185/18/186/15/187/13/188/10/189/07/1810/05/1811/02/1811/30/1812/28/181/25/192/22/193/22/194/19/195/17/196/14/197/12/198/9/19
RR
SOUND THE HORN
RAILROADS’ EFFICIENCY GAINS (AS MEASURED BY THE RATIO OF THEIR
OPERATING EXPENSES TO OPERATING REVENUE) ARE MODERATING....
...WHILE PRICES FOR TRUCKING COMPETITORS ARE FALLING...
...AND RAILROAD TRAFFIC VOLUMES ARE FALLING.