Railway volumes have failed to meet already lowered expectations this quarter, raising the question of whether this is the “storm before the calm” or a sign of broader economic weakness.
The most surprising development in the second quarter has been the softness in intermodal volumes, which tends to indicate declining consumer demand, CIBC analyst Kevin Chiang said in a note to clients.
Combined with ongoing commodity weakness, carloads for the largest North American railways are down 11 per cent so far this quarter, a steeper decline than the six per cent drop seen in the first quarter.
Crude-by-rail is running out of track as the economics behind it lose steamCanadian National Railway Co CEO tells government to ‘step back’ from rail regulations
“The question is whether this is the storm before the calm and volume trends do start to improve in (the second half) or whether rail carloads are indicating something more concerning in the broader economy,” Chiang wrote.
Until we know the answer, it’s likely that rail stocks will remain “in a period of heightened volatility,” he said.
It could be worse, though — volumes are still well above the nadir they hit during the recession of 2009.
Average weekly carloads for April were well above 2009 lows, and the Canadian railways are faring better than their American counterparts, according to RBC analyst Walter Spracklin.
While volumes for the big North American railways as a group are 18 per cent above recession lows, Canadian National Railway Co.’s volumes are 40 per cent above and Canadian Pacific Railway Ltd.’s are 23 per cent above.
Spracklin attributed this outperformance to a more robust rebound since 2009 and less impact from the ongoing decline in coal demand.
Moody’s recently lowered its industry outlook to negative from stable, citing the “unprecedented” 37-per-cent year-over-year drop in April coal shipments.
Shares of CP and CN are down 4.7 per cent and up 0.8 per cent year-to-date, respectively.
CP chief executive Hunter Harrison told an investment conference Wednesday that he sees light at the end of the tunnel despite “real softness,” particularly in domestic intermodal volumes.
“2016 has turned out to be quite a challenge for us, particularly as we look at the second quarter and softness of some of the volumes,” Harrison told the Wolfe Research transportation conference in New York.
“Having said that, I would say that there’s some good news on the horizon. If I had made these comments two or three months ago, they would have been a little less bullish, I think.”
Harrison pointed to improvements in grain and potash volumes and said he expects the second half of the year to be better than the first.
He added that he believes CP can still meet its full-year guidance of double-digit growth in earnings per share.
“I think it’s realistic that we could certainly make those numbers,” Harrison said. “Now, is it going to be easy, is it going to be comfortable? Probably not. But I think it’s something that’s certainly doable.”