Bernstein Sees Improving Volume Trends Across The Board In Rails, Positive On Intermodal Growth

Railroad operators have reported slight improvement in the overall volume trend across the board, along with intermodal growth, Bernstein said as part of its weekly carload summary.

Lead analyst David Vernon noted the 4W average volume growth is 1–4 percent higher than the 13W average growth, with Canadian National Railway (USA) (NYSE: CNI) and Canadian Pacific Railway Limited (USA) (NYSE: CP) showing positive growth. Further, Norfolk Southern Corp. (NYSE: NSC)’s volumes are about flat based on 4W average data.

For coal, the analyst believes the rate of change in 4W average coal volume is improving across the board, except in Canadian Pacific and Kansas City Southern (NYSE: KSU), “where it's getting worse.” Natural gas prices in the $3.10–$3.20 range are somewhat offsetting pressures from high inventories.

Related Link: Rail Earnings Season Scorecard

Meanwhile, the brokerage sees improving merchandise volume growth, except in CSX Corporation (NASDAQ: CSX) and Union Pacific Corporation (NYSE: UNP), where it's about flat. Consistent growth is seen in food, grain, lumber and some building products like sand and stone. Auto trends are moderating.

Further, Vernon said intermodal growth trends are improving by 7.6 percent for CSX, 2.8 percent for Norfolk Southern and -2.6 percent for Union Pacific, with the rest of the group's trend being flat to slightly negative.

“Weakness in intermodal volume is primarily due to weaker international traffic, and we continue to think that domestic activity should rebound into 2017 based on what we are seeing in spot rate data and hearing from larger shippers,” Vernon wrote in a note.

Ratings, Price Target

• Canadian National Railway: Market Perform with a target price of $68.
• Canadian Pacific: Outperform, $171.
• CSX: Market Perform, $32.
• Norfolk Southern: Market Perform, $96.
• Union Pacific: Outperform, $110.

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