Inside This Issue
· Stubbornly Stagnant: Will the Domestic Intermodal Slump Ever End?
· Stock Shock: UP Shares Down on Coal, Construction, Grain Declines
· Where are the Engineers? Watching the Buccaneers: UP Cites Crews Calling Out
· Who’s the New Lord of the Board? NS to Announce New Chairperson This Week
· “We’ll Take That”: CSX Pleased with Q2 Traffic Gains… Despite Coal Crunch
· Sesame Street Sweet: CN Enjoying Strong Increase in RTMs This Quarter
· What’s Next After Diesel? A Look at the Options
Track Talk
“Ultimately, this is all about growth. Let’s not lose sight of that.”
-Union Pacific CEO Jim Vena (speaking at a Wolfe Research event in New York)
The Latest
· Another investor event, this time hosted by Wolfe Research, gave an even clear picture of the market dynamics that railroads face going into the summer. Coal concerns top the list of headaches, especially for western railroads like Union Pacific. The endlessly slumping domestic intermodal market is hardly more cheerful. Other areas of the business, however, including autos and chemicals, are faring better. We’ll get another update this week as several railroads present at a conference hosted by Bernstein Research.
· Norfolk Southern, whose operations chief John Orr spoke at the Wolfe conference (see below), continues to address unresolved matters from East Palestine. Last week, it reached a $310m agreement (subject to court approval) that would resolve all outstanding East Palestine-related claims by the federal government (specifically the Environmental Protection Agency and both the Interior and Justice Departments). NS experienced its fateful East Palestine derailment in February 2023. Among other provisions, NS last week agreed to spend $244m on a package of safety initiatives, technology, and training. This doesn’t, however, change the company’s financial outlook, including its estimate of capital spending (it was all baked into earlier assumptions). NS in the meantime continues to pursue insurance reimbursements and third-party claims.
· Separately, the new Norfolk Southern Board of Directors—which includes the three new members championed by Ancora (Lamphere, Fahmy, and Clyburn)—met for the first time (virtually) on Friday. One item on the agenda was selecting a new chairperson to replace the ousted Amy Miles. The company tells Railroad Weekly that it will announce results from the meeting early this week.
· TJ Maxx, the discount retailer, said something that railroads love to hear. During its Q1 earnings call, the company talked about saving money by shifting some of its shipments “a little bit more towards the intermodal versus truck, which is more cost effective.” It expects to do more rail shipping in the future, as it tries “to be as efficient as possible… [about] how we move the goods.”
The Economy
· Tech stocks like Microsoft, Apple, Amazon, Google, and Meta are better known. But the superstar stock of 2024 is Nvidia, whose AI-essential chips drove y/y revenue growth of—not kidding—262% last quarter. Its operating margin was a stunning 65%, which dwarfs even margins from the highly profitable railroad sector—Union Pacific’s operating margin last quarter was 39%. To be clear (as if this weren’t obvious), UP’s revenues are not rising by 262% annually (they in fact declined slightly, as discussed in Railroad Weekly a few issues ago). Amazingly, the stock market as a whole, using the S&P500 as a proxy, is up 26% y/y, as the chart below shows. That could be an important reason why American households—especially higher-income households that own stock—are still spending so freely. And that, in turn, could be an important reason why the economy has overperformed expectations. The strong job market, easing inflation, moderate energy prices, worker productivity gains (these are hard to measure), and heavy federal investment spending are other possible reasons.
· Housing wealth also continues its upward ascent—the National Association of Retailers (NAR) said the median price of an existing home in the U.S. reached almost $408k in April. On the other hand, existing home sales are down 2% y/y. The Census, meanwhile, said sales of new homes dropped 8% y/y in April. The problem is still a shortage of supply, which is driving up prices. High interest rates are also weighing on the market. However, the NAR did say that total housing inventory is up 16% y/y, a welcome sign for prospective home buyers. Union Pacific often notes that about 5% of its volumes are tied to housing-related shipments; think lumber, glass, stone, cement, aggregates, rebar, roofing, appliances, etc. Though total housing starts are down y/y across the U.S., they’re up quite substantially for single-family homes.
UP’s Assessment of the U.S Economy, based on S&P Global Forecasts
still pessimistic about industrial products, housing starts, and natural gas prices
more optimistic about auto sales and overall consumer spending
source: UP investor presentation
· While railroads await a more definitive pickup in housing activity, they’re likewise waiting for a pickup in industrial activity. The latest Fed report on industrial production said manufacturing output declined 0.5% y/y in April. Activity dropped for petroleum and coal products, autos, electrical appliances, and wood products.
· Daniel Hackett of Hackett Associates, a consultancy on international trade, discussed the latest trends in a briefing with the Port of Los Angeles. He explained that imports of electronics, home furnishings, and construction materials are still well below pre-pandemic levels, even as other goods have recovered. Mexico, he said, is now America’s top trade partner. But China still accounts for 29% of all containerized imports to the U.S. by weight; the figure was 35% at its peak. More Chinese shipments are coming into Mexican ports and getting trucked across the U.S. border. Last quarter, 1.2m trucks with loaded containers crossed the border at Laredo. That’s still a modest figure but double what it was a year earlier. Other hot topics in international trade right now include tariffs and a possible east coast dockworker strike. As L.A. port chief Gene Seroka points out, however, the last time east coast dockworkers staged a strike was 1977.
Investor Event Highlights
Union Pacific
· UP’s chief Jim Vena is surely feeling good about where the railroad stands relative to its peers. It was, after all, North America’s most profitable railroad in the first quarter, delivering a 60.7% operating ratio. It’s performing well from a service perspective too, measured by both traditional metrics and the new metrics UP is now using. Still, “We’re looking at ways that we can get better across the board. And we never stop.”
· Through May 18th (week 20), UP’s freight volumes are down 1% y/y in 2024. They’re also down 1% for just the second quarter to date (April and half of May). Quarter-to-date intermodal traffic is up 3%. Auto traffic is up a bullish 8%. Even more importantly given its relative importance, chemical traffic is up 7%. Petroleum traffic is up significantly too. Then why is total traffic down 1%? The biggest blame goes to coal (down by almost a third!). Crushed Stone/Gravel/Sand, a proxy for construction activity, is down 14%. Grain is down 7%. It’s disclosure of these latter declines that likely spooked investors, which sent UP’s stock down 5% last week.
UP’s Outlook (source: company presentation)
· To repeat, total Q2 carload/container volumes are down 1% y/y so far. But measured by RTMs, which factor in weight and distance, volumes are down by more like 4% to
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