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Railcar Whisper

Railcar Whisper
 

Research Question: Are current railcar order trends sustainable or will a drop in demand result in an oversupply?

Companies Covered: American Railcar Industries (ARII), Trinity Industries (TRN), GATX Corp. (GMT), Greenbrier Industries (GBX), Berkshire Hathaway (BRK.A)

Report Available: June 20, 2014

 

Blueshift’s initial research shows railcar orders experiencing tremendous growth over the past year, but a history of oversupplying the market in good times, potential government regulations, and a growing oil pipeline infrastructure may be signs of an impending slowdown in growth resulting in overbuilding.

 

Observations

  1. U.S. railcar orders have been increasing over the past year as shipments of crude oil increased 100% in 2013 and growth is expected to continue after seeing a 20% increase so far in 2014. The total railcar industry backlog at the end of 2013 was 72,900 railcars. Orders for railway cars of all types increased by 62% sequentially in Q1, with covered hopper orders seeing a surge to 14,765 cars from 1,200 a year ago. This explosive growth has benefitted many major players in the railcar industry including Trinity, American Railcar, GATX, and Greenbrier.
  2. TRN has seen the benefits of increased demand for its railcars as its Q1 earnings reported a record $5.2 billion backlog consisting of 42,360 railcars, up from $5.0 billion in Dec 2013, and posted a revenue increase of 57% year-over-year. GMT lease revenue jumped considerably due to higher lease rates, while its fleet utilization was 98.5%, up from 97.8% a year ago. Continued railway system congestion is slowing trains down, as are safety standard requirements, resulting in an increased demand for railcars used in unit trains, such as grain and intermodal, where companies like GBX excel. Another benefit for railcar manufacturers and lessors is the U.S.’s aggressive expansion of crude-by-rail coupled with pending government regulations on cars that carry, which will create a rise in demand for new or retrofitted tankers.
  3. Of great concern for the railcar industry is the risk of overbuilding because of the current short supply and increasing demand. Historically, railcar manufacturers have built too many cars in a time of growth, leading some to believe that this may happen again, especially as growth is predicted to flatten after 2016. Other threats to the railcar industry include recent derailments, government regulation, and a growing oil pipeline infrastructure. Railcar transportation has come under increased scrutiny this year after five recent derailments, including the most recent one in Lynchburg, VA. Higher oil and gas prices coupled with CAFE standards and other policies are reducing the demand from consumers, resulting in the slowing growth of oil consumption, which could limit the need for such aggressive railcar expansion. Oil producers may choose pipeline transport over rail, as many North American pipelines are increasing capacity and expanding. There is also uncertainty surrounding potential regulations on tank cars carrying flammable liquids, which could upset railcar industry momentum.

 

To see other ideas Blueshift Research is currently working on, please click here.