With rail traffic lower year-over-year and precision scheduled railroading (PSR) initiatives in full swing at the Class I railroads, it's understandable that demand for railcars has slowed.
U.S. railcar manufacturer and lessor The Greenbrier Companies (NYSE: GBX) and railcar lessor GATX Corporation (NYSE: GATX) provided overviews of the industry and their operations in separate presentations at the Cowen and Company 12th Annual Global Transportation Conference.
The Greenbrier Companies
Justin Roberts, Vice President of Corporate Finance and Treasurer of Lake Oswego, Oregon-based GBX was immediately questioned after his presentation outlining the current state of affairs – total carloads down 2.5 percent year-over-year so far in 2019, railcars in storage up 16 percent year-over-year to 341,000 units (20 percent of the industry fleet) and future annual delivery forecasts recently lowered to the 45,000 to 50,000 range.
When asked "how bad is it?" Roberts said that GBX is seeing "a lot of customer inquiries" that are leading to orders for new railcars. Roberts said that GBX hasn't seen the robust order activity (6,500 units) it reported in its May-end fiscal third quarter report, but noted that orders haven't "fallen off a cliff." He said that it is common to see quarterly order activity in the 3,000 to 4,000 range and as high as 5,000 units following a quarter of outperformance.
When asked if he was surprised by the order level seen last quarter given lower rail volumes and PSR enhancements, Roberts said he was surprised to the degree with which orders increased. Although he said that the customer has changed – more equipment lessors are actively purchasing equipment and they tend to have a longer-term view of the market. As with most manufacturing industries, it's not uncommon to see opportunistic purchasing take place on the downside of the cycle.
Roberts said that PSR may not have the stifling impact on railcar manufacturing demand as many currently think. He believes that some of the decline in railcar buying has more to do with cyclical demand fluctuations and less to do with PSR enhancements.
When asked about the company's recent acquisition of the manufacturing business of railcar builder American Railcar Industries (ARI) from ITE Management, Roberts said that the transaction provides GBX with a new customer base due to the increased product offering and expands its manufacturing footprint into the Midwest (Arkansas and Missouri). The $400 million deal closed at the end of July.
During the presentation, Roberts reiterated the company's guidance regarding the fiscal fourth quarter, which closed at the end of August. The company's fourth quarter guidance calls for 7,000 to 8,000 railcar deliveries, revenue of $1 billion and adjusted earnings per share of $1.30 to $1.50. On its fiscal third quarter earnings call, management lowered full-year 2019 guidance to $3.05 per share at the midpoint of the range compared to the prior $3.70 per share midpoint of its prior range. Additionally, they said that they would be "hard-pressed" to produce earnings less than $3.20 per share in fiscal 2020, which began on September 1. Sixty percent of GBX's $2.7 billion backlog is slated for fiscal 2020 production.
Presenting at the same conference, Bob Lyons, executive vice president and president of Rail North America at GATX Corporation, noted that current market demand for railcar leasing remains "weak."
The railcar leasing company, which leases approximately 148,000 railcars to shippers and railroads globally, said that the industry manufacturing backlog remains high relative to roughly flattish railcar loadings over the last few years. While the industry has moved past the record backlogs seen in 2014 and 2015 when the outlook for tank cars carrying crude oil by rail and frac sand cars supporting the fracking boom were elevated, excess capacity overhangs the industry, placing downward pressure on lease rates.
Lyons said that GATX has had more success negotiating lease prices on tank cars as demand for this car type is more favorable, but said that there is significant pressure on general freight cars due to an oversupply throughout the industry.
Even with the demand headwinds, GATX has been able to maintain its high equipment utilization rates (99.5 percent at the end of the second quarter 2019). In the period, the company had success renewing approximately 85 percent of its expiring leases, although it reported a 2.8 percent decline in its lease price index.
When asked about the impacts of a macroeconomic recession on the business, Lyons said that a recession would place further pressure on rates and that GATX would likely have to shorten the duration of lease terms to maintain utilization rates. However, Lyons noted that during the last major downturn in railcar demand (2010), the company was able to keep its utilization rate at 95 percent across its portfolio given its diversity in car types and customer end markets. Further, Lyons believes that a recession would likely provide GATX with an opportunity to acquire other fleet portfolios as some of its competitors could be forced to exit the industry.
GATX has 17,800 railcars up for renewal in 2019.
GATX Stock Chart – SONAR
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