What Changes Are Expected to Hit Railroad Shipping This Year?

You see their trains riding next to you out your car window and you rely on the goods they deliver to your favorite store’s shelves. Railroad Shipping companies like CSX, Norfolk Southern, Union Pacific, and Kansas City Southern keep the United States in motion. Throughout 2018, there have been significant changes in these railways and the outlook for continued revenue growth is good. CSX has redefined the industry, stock prices are up, and a growing economy means more freight traffic.

CSX Redefining the Industry

In the past year, one company that has noticeably changed is CSX. They announced a new structure for operations management after 2017 left them without a CEO in place. Some of the changes included more robust safety programs, system engineering updates, and a creation of East and West operations.

In March 2017, the company hired Mr. Hunter Harrison, a new CEO, who tragically passed away at the end of 2017 after months of shakeups and staff cuts. Harrison spearheaded the charge to make CSX a leaner and more profitable company. This year, their margins are much more favorable because of these cuts. CSX is investing in buying back stock and is generating record free cash flow as well as issuing dividends for 2018. All of this serves as an example of the general outlook toward rail as it currently stands within the United States.

Railroad Stock Prices Are Up Because of the Booming Economy

In terms of investment strategy, many advisors see rail as a strong investment with solid growth fundamentals. There are a few factors driving the growth of railroad stocks. Analysts have determined a few macroeconomic factors which are increasing stock prices. These include:

  • The booming economy leading to more rail orders
  • Consistent volume growth in rail traffic
  • Tight capacity across all forms of transport
  • Rail pricing is accelerating and the market is bearing it
  • As CSX gets leaner, it is leading the way for other rail companies to follow
  • Leading railroads are generating record free cash flow

Rail stocks are currently considered to be a sound investment. When analysts make this decision, it is with consideration to financial performance, future outlook, and a full range of economic factors. Stocks are up which means railways are doing well.

A Higher GDP Leads to More Freight Traffic

The supply chain is fully connected and relies on all types of transportation. Whether an OEM part needs to make it to the factory or the final product needs to get to the customer’s warehouse, the only way to get these goods where they need to go is by rail, air, ocean or truck. This year is shaping up for solid GDP growth as well as a low rate of unemployment.

Consumers are also purchasing more because personal income is rising. The cycle begins when consumers make purchases, purchases drive production, and production drives delivery. The Railroad Tie Association (RTA) predicts there will be an increase in railroad freight specifically if the GDP increase reaches 3 percent or higher.

Potential Tax Reform and Trade War Issues

Tariff increases are proposed with China. A potential tax reform is poised to impact major corporations. Yet, a trade deal to re-secure the North American Free Trade Agreement will either keep it the same, make it more difficult, or make it easier to buy and sell products across North America. Kansas City Southern, specifically, is impacted by NAFTA agreements, as their revenue and trade with Mexico is about half of their total revenue. Analysts are predicting this will be a favorable outcome which ultimately benefits rail prices.

While there currently isn’t any evidence of the market slowing down, there are a few political factors to keep in mind.

What Will Be the Net Effect of Consumer Spending in 2018?

It is predicted that the net effect of consumer spending will be higher. (It is the general rule that consumer spending impacts about 70 percent of the GDP). Yet several factors will cause an ebb and flow in this net effect.

The estimates surrounding consumer spending are both favorable and unfavorable. Consumers are making more money, but the averages are skewed because high earners are getting pay increases. Historically, higher earners do not consume as many new goods and services if their income increases due to the fact they may have already made these purchases. This could leave overall spending at the status quo.

The Federal Reserve is poised to make at least one interest rate hike this year. This would also decrease consumer spending slightly. Yet, the average American may not react to these interest hikes because it does not impact daily life for the individual. Many Americans already carry high debt ratios and would not have received a favorable interest rate during a lower time.

Rail Companies Can Charge More for Freight

As the trucking industry gets squeezed to capacity, the only logical choice is rail. Rail companies can demand higher prices and work with organizations they want to deal with. According to the transport consultancy group Tioga Group, “Railroads are generally optimistic about increasing shareholder value in 2018 given the growing industrial economy, the prospect of tax reductions, and the tightening of truck capacity.” These three positive factors work together to build favorable conditions for rail operators.

The Tioga Group predicts the rail inflation rate for 2018 to be around 1 to 2% above inflation.

Increased Reliance on Spot Rates

There is a strong connection between the growth in ocean container shipping and freight rates. Rates have increased (after being lower in 2016 due to an economic downturn). Rail carriers may demand higher spot rates for their deliveries because consumers demand continuity of service and access to goods around the clock. Rather than leaving shelves empty, consumers may pay more at checkout to get rail freight there much more rapidly.

In summation, this year is a year of growth for railroads. Revenue is up, stock prices are reaching all-time highs. This is because of several consumer, economic, and political factors impacting United States commerce. The overall effect of this growth will be the ability to demand higher prices while the industry goes through a trend toward leaner operations. Keep your eye on the rail industry for the rest of 2018!

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