Class I Rail Traffic 2017 Year-End Update - Fine Finish To A Strong Year

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Includes: BRK.B, CNI, CP, CSX, KSU, NSC, UNP
by: James Sands

Summary

Total Class I rail traffic finished the year up 4.3 percent with carload and intermodal traffic up 3.6 and 5.2 percent.

Some top carload commodities fizzled out as the year progressed, but combined with intermodal traffic, performance was strong.

Initial focus for 2018 will be on tax reform impacts, pricing discipline and traffic.

Total Rail Traffic – 2017 Year-End

Source: Class I Rail Operators – units carried

For the year, total rail traffic was up 4.3 percent from last year. Intermodal unit traffic performance continued to be very strong for Class Is throughout the year. Both container and trailer results outperformed most commodities for the year and displayed strong correlations with top North America seaport international container traffic. Carload commodity traffic was mixed with half showing weakness in 2017, but from a volume perspective, three out of the top five were positive.

It should be noted that all carload and intermodal unit traffic is reflective of carried railcars. Carried railcars are a combination of carloads and/or intermodal units originated and received. Investors looking for information regarding unique carload and intermodal unit growth should review the weekly rail traffic reports provided by the American Association of Railroads (NYSE:AAR). Despite the “double-counting” effect from using carried railcars, this is an important metric since all railroad operators collect revenue from customers for railcars utilizing any part of their network or equipment. Additionally, performance is relatively close.

Year-End 2017 Report

Class I total traffic performance for 2017 was up 4.3 percent versus 2016. After five straight months of anemic monthly growth, December finally displayed a more positive result. The 4.3 percent improvement during 2017 was solid after two consecutive declines at -2.7 and -4.9 percent.

Comparatively, total U.S. originated rail traffic was up 3.4 percent for 2017, a 10-bps increase from the previous month. Mexico originated rail traffic for the year, was up 2 percent (a 50-bps improvement from last month), while Canada was up 10.6 percent (flat from the previous month). Overall, North America railroad traffic was up 4.8 percent for 2017, a 10-bps increase. This mirrors the 4.3 percent growth for U.S. and Canada Class Is carried railcars, flat from previous month.

On a year-over-year (YoY) basis, total rail traffic remained below the 5 percent level for the eighth time out of the previous 14 months. Despite this trend, December reflected the fourteenth consecutive month of positive performance. Canadian National (CNI) finished the year as the strongest performer with total rail traffic up 10.4; a 20-bps decline from November.

Canadian National led all Class Is for intermodal units, up 16.3 percent; Kansas City Southern (KSU) was the leader for carload units up 6.8 percent for the year. Other performance for total rail traffic for the year was as follows; BNSF (BRK.B) 5.5 percent, Kansas City Southern 4.9 percent, Norfolk Southern (NSC) 4.7 percent, Canadian Pacific (CP) 4.5 percent, Union Pacific (UNP) 1.9 percent and CSX (CSX) 0.2 percent. Carload traffic has weighed on most Class Is, with CSX now witnessing six consecutive monthly YoY declines; Canadian National witnessing three out of the past four; Union Pacific witnessing two negative months out of the past six (two also being flat); and with BNSF witnessing only two positive months out of the past six.

For Class I container traffic YoY, December performance increased by 6.7 percent versus last year, a 170-bps increase from November’s 5 percent. Investors should note that container traffic includes both international and domestic services.

The month of December represented the eighth consecutive month with results at or greater than 5 percent, YoY. Current results have sustained strong performance, leading to consistently better results versus carload traffic.

December reflected the fourteenth positive month out of the previous 16. The 6.7 percent performance was fourth highest during this period. Trailer traffic has now witnessed ten consecutive months of positive growth from last year, December’s result declined by 490-bps from October to 11.2 percent, but recorded the third consecutive month of double-digit gains YoY. Of total intermodal units carried for the year, trailers reflected nearly 6.5 percent.

Source: Class I websites and personal database, container units carried

For the year, the majority of Class Is witnessed strong periods of positive growth for container units carried. Canadian National dominated Canada’s intermodal performance, but Canadian Pacific has gotten back on track over the last four consecutive months of the year. Kansas City Southern finished the last three months of the year strongly as well. It should be noted that Canadian National’s trailer performance is reflective of an immaterial amount of traffic during 2016.

U.S. and Canada Class I carload traffic increased YoY by 2.8 percent, reflecting a 290-bps increase from November. This was the first time over the previous six months that performance eclipsed 1 percent from 2016. As was the case during the latter half of 2017, strong performing commodities including coal, grain and motor vehicles and equipment will continue to face higher comps from last year.

December’s performance showed much stronger growth YoY; marginal results has been a trend over the past six months, aside from the last month. For the year, all Class Is in the U.S. and Canada maintained positive carload traffic, with the exception being CSX. CSX has witnessed six consecutive monthly declines YoY, Canadian National has witnessed three out of the past four, Union Pacific has witnessed two out of the previous six (with two also being flat), and BNSF has also witnessed three out of the previous six.

For Class I carload top five commodities, coal remained negative YoY for the fourth consecutive month, down at -1.7 percent, versus the -5.6 percent decline during November. Performance for Class Is for the year was as follows; Norfolk Southern 15.5 percent, Kansas City Southern 10.9 percent, BNSF 6.5 percent, Union Pacific 6.3 percent, CSX 4.6 percent, Canadian Pacific 0.5 percent and Canadian National at -16.9 percent. Coal performance will remain pressured for volume in the near-term, pricing has shown modest improvement lately.

Chemicals performance was up 1.7 percent during December YoY, versus the 1.9 percent performance during November. Performance for Class Is for the year was as follows; Canadian Pacific 7.3 percent, Union Pacific 3.3 percent, Canadian National 2.9 percent, Norfolk Southern at 1.7 percent, BNSF at 1.2 percent, CSX 0.3 percent and Kansas City Southern -1.2 percent. Chemicals should remain positive and stable for the near-term.

Source: Class I websites and personal database, carloads carried

Motor vehicle and equipment performance declined at -1 percent during December YoY, versus a -1.6 percent decline in November. Performance for Class Is during the year was as follows; Kansas City Southern 16.8 percent, BNSF 9 percent, Canadian National 2.6 percent, CSX at -4.7 percent, Norfolk Southern at -4.8 percent, Union Pacific at -6.7 percent and Canadian Pacific at -15.3 percent. December’s performance reflected the eighth negative month out of the past nine..

Grain performance declined at -5.6 percent during December YoY, versus the -12.5 percent decline during November. Performance for Class Is for the year was as follows; Canadian Pacific at 4.5 percent, Canadian National at 1.7 percent, Norfolk Southern at -1.1 percent, Kansas City Southern at -1.2 percent, BNSF at -2.7 percent, Union Pacific at -3.9 percent and CSX at -11.4 percent. December’s performance reflected the sixth consecutive monthly YoY decline in over one year.

Petroleum performance increased by 14.1 percent during December YoY, versus the 4.9 percent increase during November. This marked the eleventh time during the previous 24 months that petroleum has performed in negative single-digits, or better, and the third consecutive positive monthly result.

Performance for Class Is during the year was as follows; Kansas City Southern 30.9 percent, Canadian Pacific at 15.1 percent, Canadian National 7.5 percent, Norfolk Southern at -6.9 percent, Union Pacific at -12.3 percent, BNSF at -13.4 percent and CSX at -13.5 percent. Canadian and Mexico energy-related variables continue to be very positive for crude-by-rail.

Crushed stone, gravel and sand increased by 31.9 percent during December YoY, versus the 26.9 percent increase during November. This was the twelfth consecutive month of double-digit performance versus last year; the eleventh with performance at, or greater than 23 percent.

Performance for Class Is during the year was as follows; Canadian Pacific at 108.5 percent, Canadian National at 65.8 percent, Kansas City Southern at 33.8 percent, BNSF at 31.7 percent, Union Pacific at 24.6 percent, Norfolk Southern at 8.1 percent and CSX at 4.9 percent. Demand remains robust as oil and natural gas E & P shale development increases.

Based on the performance by individual Class Is, coal, chemicals, motor vehicles and equipment, grain and crushed stone, gravel and sand have continued to lead the improvement for carload traffic performance for the year, despite the recent slow-down and in some cases, negative results.

Metals products remains positive as the seventh highest commodity by traffic through December up 5.9 percent. As stated, over the past couple of reports, the majority of these commodities may continue to experience higher comparable levels in the short-term. Investors should continue to monitor the top six commodity trends as they reflected nearly 69 percent of carload traffic for the year.

For the year, rail stocks finished up strongly. CSX was the top performer, up 53. This was followed by Norfolk Southern, Union Pacific and Canadian Pacific, up 34, 29 and 28 percent; and Kansas City Southern and Canadian National up 24 and 22 percent. All Class Is ended up outperforming the SPDR S&P Transportation ETF (XTN) and the SPDR S&P 500 ETF (SPY), which finished up 21 and 19 percent.

Expectations remain positive for Class Is into 2018. This is based upon positive impacts from tax reform, disciplined product pricing and stable/improving rail traffic. These are the three primary factors for investors to pay attention to over the next year. The East Coast has already begun witnessing major weather issues, which may also disrupt transportation. Of all peers, Kansas City Southern offers the strongest upside potential, but trade policy uncertainties remain.

Disclosure: I am/we are long CNI, KSU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.