Loop Capital: Days Of The 'Rail Renaissance' Feel Like Distant Memory

Loop Capital's Rick Paterson says the mid-single-digit pricing growth in the rail sector feels like a distant memory amid deteriorating pricing environment.

Paterson cited two industry themes: i) a lack of conviction on 2017 freight volumes and ii) pricing continues to decelerate following the end of the “Rail Renaissance.”

“Despite historically easy year-over-year comparisons managements are unwilling to stick their neck out and forecast growth rates beyond GDP or low-single digits,” Paterson wrote in a note.

Positives

On the positive side, Paterson said both Norfolk Southern Corp.NSC and Canadian National Railway (USA) CNI were able to grow freight loadings year-over-year in the fourth quarter, suggesting there is some potential to exceed expectations. Norfolk will report Wednesday, while Canadian National will announce its quarterly results Tuesday.

“It will be interesting if this also translates into a more optimistic tone in terms of 2017 volume growth,” Paterson continued.

Previous Prints

Commenting on the recent fourth-quarter results of railroads, the analyst said CSX Corporation CSX posted decent results. But, CSX projected a more cautious stance toward 2017 freight volumes than the market was probably expecting, despite very easy comparisons over 2016.

Meanwhile, investors gave Union Pacific Corporation UNP a thumb's up after delivering earnings per share 5 percent above consensus expectations.

In addition, Canadian Pacific Railway Limited (USA) CP’s fourth quarter earnings came in 3 percent below consensus and EPS growth in 2017 was also guided below consensus. But, the market was unfazed and bid up Canadian Pacific higher.

“Likely due to the fact that CP’s commentary on 2017 margin drivers implies earnings that are above its explicit guidance, and maybe some speculation that a Hunter Harrison-controlled CSX could ultimately be a buyer of Canadian Pacific down the road,” Paterson explained.