Eastern Railroad Discussion > Barrons: Rail Stocks could struggle

Investment magazine Barron's has a long read piece this morning about railroad stocks. Quoting a number of investment analysts, the article asserts some are taking down earnings and reducing revenue (volume) outlooks.  The CSX and UP conference calls were both discussed on TrainOrders, some of the same points are in the article.

There's a quick review of PSR, but concern that a lot of the low hanging, easy fruit has been picked. And, with volume slipping, railroads may have little room to raise prices.

Many debatable points in this paywall protected article.  It should be available on the internet by Monday.
https://www.barrons.com/articles/railroad-stocks-could-struggle-as-challenges-mount-51568419201?mod=hp_HERO

Outside of all the operations issues we could all argue about, psr relies on raising rates. Period. They offset their volume losses by raising rates and adding fees. Most of the customers have fixed infrastructure and aren't going to invest in a partner that doesn't want them. Imagine being that customer who shipped 60 car loads a week being told you are going to have your rates increased, fees raised, and service cut in half. They only want to come twice a week instead of the weekly service you were given for the last say, 30 years. The only way for YOU as a customer to keep dealing with the railroad is to invest in adding track to hold that same level of cars. Meaning more demurrage fees. And less timely service. Add to that, the railroad is going to possibly continue to raise you rates. THAT is psr for the customer. Many have pulled their rails and service. Proponents of psr say how wonderful this is because now the railroads can get traffic faster for those willing to pay more. The psr only allows the next level of cuts because THAT is the only way psr can continue to show a higher operating ratio.

The railroads have created a big part of this traffic drop. They went after the captive shippers who typically have a relatively stable traffic level and ran many of them away. With the economy softening due to the upcoming election, the railroad is losing some of what would be shipping and the customers who weren't giving them 40% rate of return left. They've cut their leg off to save weight and now can't figure out why they can't stand up.

The ONLY way to grow business is to invest in it. The only way to grow traffic is to go after it. The only ways to keep customers is to keep them happy. PSR doesn't do any of these things.

Joe

I think it was Scraphauler who posted my favorite quote of all times-- "No one is shipping by rail because they want to."  Working around this industry over the years, there is not a statement I can't more solidly get behind.
 

Having spent 40 years as a rail shipper, I absolutely agree. To borrow from a gentleman who posts on Fred Frailey’s columns as “The Numb Shipper”; I like trains but I dislike railroads.

Given the option throughout my career; I’d have used trucks seven days a week and twice on Sunday.

Posted from iPhone

ShortlinesUSA Wrote:
-------------------------------------------------------
> I think it was Scraphauler who posted my favorite
> quote of all times-- "No one is shipping by rail
> because they want to."  Working around this
> industry over the years, there is not a statement
> I can't more solidly get behind.
>  

I've read about alot of happy shortline customers shipping by rail, so I think you mean Class 1 customers.

No sound business wants to ship via rail vs truck. unless....... 

Your business/ resourse is in the middle of nowhere
Your an ultra high volume, ADM, Georiga Pacific, UPS, etc. They move alot and that 15% to 30% savings adds up over time.  
coast to coast
Whoever you purchase or sell to forces a move via rail.
Or you have the patience for it.

 

The problem is the majority of traffic may originate or terminate on a shortline, and the shortline likely does provide quality service, but the traffic more than likely has to travel over a Class I at some point. Unless you are a customer lucky enough to get your traffic over only shortlines, which is unlikely, you are going to have to "deal" with the Class I's. 

I recall a few years ago in Michigan there were a lot of issues with the GLC (who is known for quality service to customers), getting their cars from CSX at the AnnPere Interchange. Cars were stacking up on the interchange to the point almost the entire Howell Passing Siding was full of cars. Customers have no control over when CSX is delivering the cars to the GLC interchange. 

(To be fair, CSX was also saying cars that were left at the interchange were not being picked up as well, so it may have gone both ways). 

Rail strategists are undoubtedly aware of the various purchasing manager / supply management forecasts.  These closely watched reports provide an insight into what a wide range of corporations expect to buy in the next 3, 6, 9 etc months.  It's useful because it has a high degree of credibility, and reflects orders received or expected by manufacturers.

The ISM is currently forecasting a mild contraction in the economy over the next year. If that happens, rail shipments would likely drop, too. 

https://www.cnbc.com/2019/09/03/the-manufacturing-sector-is-contracting-according-to-ism-survey.html