For Immediate Release
Chicago, IL – January 04, 2017 – Today, Zacks Equity Research discusses the Railroads, Part 2, including Union Pacific Corporation (NYSE: (UNP - Free Report) - Free Report ), Canadian Pacific (NYSE: (CP - Free Report) - Free Report ), Canadian National Railway Inc. (NYSE: (CNI - Free Report) - Free Report ), Kansas City Southern (NYSE: (KSU - Free Report) - Free Report ) and Norfolk Southern Corporation (NYSE: (NSC - Free Report) - Free Report ).
Industry: Railroads, Part 2
Railroads have several factors working in their favor for the coming year. Better coal volumes and industrial growth alongside improvement in intermodal volumes and pricing are likely to help the industry turn around. This year, the sector underperformed due to slow growth across key industries and challenges like adverse weather conditions and the continued shift to renewable energy.
However, certain events like the outcome of the U.S. Presidential election should give the industry a much-needed boost. Additionally, expansion of the Panama Canal is expected to eventually result in higher volumes on the U.S. shores and in turn, boost intermodal and freight traffic. The expanded Panama Canal is expected to favor companies with extensive operations on the U.S. East Coast and those shipping to the Gulf Coast.
In fact, credit rating giant Moody’s has given a stable outlook for North American Railroads for 2017. Per Moody’s, revenues are expected to grow in the range of 0% to 0.25%. Freight volumes, on the other hand, are expected to stabilize near the current levels after seeing sharp declines in 2016. Moody’s expects core pricing to rise between 2% and 2.5%. Other factors like better grain shipments, intermodal volumes and rebound in coal shipments should also support growth.
Coal makes up a significant portion of revenues for most Class 1 Railroads. However, coal volumes have slumped drastically over the past few quarters, mainly due to the shift toward clean and renewable sources of energy.
However, this trend is likely to change here at home. Unlike his predecessors, President-elect Donald Trump is a supporter of clean coal as a source of energy. Clean coal is a term used to define a form of coal production which is less harmful to the environment due to the use of a technology called carbon capture and storage. Trump is in favor of increasing jobs in the coal sector and possibly relaxing regulations. Additionally, if industrial production starts growing, coal volumes could increase further.
Moody’s has also changed the outlook of North America’s coal industry to Stable from the earlier Negative rating. One of the key reasons for this change is the improved pricing for metallurgical coal benchmark prices. Consolidation in the coal industry after Chapter 11 reorganization of coal producers and better debt levels might also stabilize the coal sector. Thus, a more bullish coal outlook is indeed expected to boost Railroads in spite of the existing challenges.
Fuel plays a dual part for the performance of Railroads. While crude oil makes up for part of the operational costs of railroads, it also contributes to revenues through fuel surcharge. Brent oil prices have been steadily declining over the past two years. Overproduction and lower demand had seen oil prices plunging to all-time lows.
However, with OPEC members reaching a new agreement on production cuts, fuel prices are likely to start moving up again. Oil prices might touch a range of around $60-$70 per barrel by the fourth quarter of this year. However, it should be noted that there is no certainty on fuel price improvement as several factors affect it.
For Railroads, higher fuel prices might lead to increment in fuel surcharge, which is expected to increase revenues for these companies. There also lies a possibility of higher economic demand due to better macroeconomic conditions that could further increase demand for fuel.
Progressive railroading published interviews of some of the top executives of U.S. Class 1 Railroads. Although the industry continues to grapple with several challenges, these executives are positive on a various aspects for the upcoming year. According to Lance Fritz, Chairman, President and CEO of Union Pacific Railroad – part of Union Pacific Corporation (NYSE: (UNP - Free Report) - Free Report ) – positives include an uptick in crude oil and natural gas prices, which might boost coal and shale demand, lead to higher grain production and stronger lumber market due to improvement in housing.
Light vehicle sales are also encouraging. Canadian Pacific (NYSE: (CP - Free Report) - Free Report ) CEO E. Hunter Harrison sees better performance in coal, potash and grain markets. The grain crop in Canada, in particular, had touched record levels in fall this year but harvest and movement were adversely impacted and delayed by weather.
President and CEO of BNSF Railways Co. Carl Ice anticipates consumer spending to boost intermodal volumes. He also sees a soft improvement in agricultural products volumes with higher demand for crops like soybeans and corn. The company also sees a new opportunity for growth in plastic resins production.
Canadian National Railway Inc.’s (NYSE: (CNI - Free Report) - Free Report ) President and CEO Luc Jobin expects strong volumes in housing-related, automotive and grain shipments. He also anticipates improvement in crude oil and frac sand business.
President and CEO of Kansas City Southern (NYSE: (KSU - Free Report) - Free Report ) , Patrick Ottensmeyer, expects significant growth opportunities from the increment in Mexican automotive production and the energy segment.
Norfolk Southern Corporation’s (NYSE: (NSC - Free Report) - Free Report ) Executive Vice President and Chief Marketing Officer Alan Shaw expects robust demand in intermodal and automotive segments, depending on industrial demand and production.
These factors and expert opinions clearly indicate that the tide is turning for Railroads and certain segments of these companies might deliver a much better performance in the coming months.
Check out our latest Railroad Industry Outlook for more news on the current state of affairs in this market from an earnings perspective, and how the trend looks ahead for this important sector at the moment.
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