1 action best placed to take advantage of post-COVID-19 railroad recovery
Like most other businesses, the railways struggled in the second quarter. Aside from the logistical challenges of coronavirus-related closures, consumer spending has plummeted. The need to deliver goods from any point A to any point B in the country has plunged.
That started to change in June and the recovery accelerated significantly this quarter. However, the recovery was not uniform. It is to favor certain railway lines – and above all Pacific Union (NYSE: UNP) – for two lucky reasons.
Rail investors do not need to be reminded that Q2 was a disaster. Union Pacific’s revenue fell 24%. Canadian Pacific (NYSE: CP) reported a 9% drop in year-over-year revenue, leading to a 5% drop in earnings per share. CSX‘s (NASDAQ: CSX) revenue fell 26%, with operating income down 37% year-on-year. COVID-19 has simply taken its toll.
That weakness is now in the rearview mirror, assuming a new coronavirus outbreak doesn’t bring the world to a screeching halt.
This is the gist of the message delivered by several railway executives at the Cowen World Transport Conference held earlier this month. Among them, Union Pacific CEO Lance Fritz, who explained, “Demand is approaching peak season levels.” Cowen analysts aggregated all the comments from the conference panelists and similarly concluded: “Freight fundamentals in all modes are strong, with retail and CPG (consumer packaged goods) Inventory restocking is a major driver of the current surge in demand. “
Explosion of intermodal traffic on the west coast
The recovery in rail traffic has not been consistent from coast to coast. It’s concentrated on the west coast, and intermodal transportation does most of the work. The two trends play in the hand held by Union Pacific.
Intermodal containers are the 20, 40, and 53-foot metal boxes (the same length as a semi-trailer) that you will sometimes see stacked on the deck of a freighter, carried by a semi-trailer, or sitting on a railcar. flat. For consumer goods, this delivery approach allows an entire container to be packed at a manufacturing site and unloaded at the end buyer’s site; logistics companies simply transport the entire box rather than handling each crate inside.
The Association of American Railroads says intermodal loads have been above 2019 levels for most of the past six weeks. Fritz further noted at the Cowen conference that Union Pacific intermodal traffic to date has increased by 8%. CSX executive Mark Wallace said intermodal volume increased 6% in the quarter to date.
This strong demand for intermodal transport makes sense. Shortages of various consumer goods are at the root of the resupply which Fritz alluded to several times at the Cowen conference. The resultant demand surge for access to Union Pacific-owned intermodal containers led to a 40% increase in spot rental prices in June, triggering a series of additional surcharges on most west coast rail shippers than railways in d other parts of the country can not order. Last month, the carrier billed most west coast shippers an additional $ 500 per container using more than their contractual allocations. Some shippers are facing even greater surcharges from Union Pacific. Small shippers in Los Angeles, for example, pay $ 3,500 or more on top of the normal cost of using its rail lines to deliver goods.
As a prospect, Union Pacific recently collected between $ 1,200 and $ 1,300 in revenue for each intermodal container it manages. And like many railway names, intermodal accounts for about one-fifth of Union Pacific’s revenues.
This supply-demand dynamic is largely confined to the West Coast – where Union Pacific is a powerhouse – because that’s where most consumer goods made in East Asia arrive in the United States. Months of sustained demand are unleashed, resulting in record prices for container rentals, reflected by record traffic in August for the Port of Long Beach and the Port of Los Angeles.
All of these goods have to go somewhere. Union Pacific can almost quote its price.
At the end of the line
Make no mistake about the message. More rail traffic is good news for railroads Across the country. Union Pacific’s competitors are also adapting, particularly to the increase in intermodal demand. In June, for example, BNSF opened a new intermodal delivery route between Seattle and a CSX terminal in Ohio.
West Coast congestion and high prices are also likely to accelerate the expansion of alternatives. Canadian Pacific added intermodal service between the east coast port of Saint John and Montreal last month, and CSX continues to work on two new intermodal terminals in North Carolina and Ohio. In addition, the Canadian Pacific Railway and the maritime shipper Maersk recently agreed to build and cooperate with a major intermodal facility in Vancouver. The advent of these and other shipping routes will reduce some of Union Pacific’s pricing power, but before that, the end of the resupply wave will also reduce some of the aforementioned surcharges Union Pacific may have imposed.
At least for the third and fourth quarter reports of this year, Union Pacific’s unique geography and its eight intermodal terminals dotted across the country have paved the way for strong results.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.