EquityResearch16January2019COREBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE29.NorthAmericaTransportation4Q18PreviewAnotherquarter,anotherdollar...Transportequitieshavefallenmateriallyoverthepastthreemonthsalongwiththebroadermarket,butanotabledichotomyhasformedasinvestorsseeminglylookforrailroadstochugalong,whileexpectingmeaningfuldegradationatnon-railtransports.SinceSeptember,railequitiesonaveragehavefallen9%comparedtonon-railtransportsonaverage18%lower(relativetotheS&Pdown11%).Andwhilewehavenotedrecently(‘TransportDataDeepDive’–published07Jan2019)thatglobalfundamentalshaveslowedfrom2018highs,especiallyinEuropeandChina,domesticallyintheUSdemandgrowthremainsrobust.However,givenstrongnegativemarketsentiment,itishardtoseehow4Q18earningswillactasacatalystforamaterialrerating.Morelikelyinvestorswillcontinuegrapplingwithrecentcommentarypointingtowardnegativeearningsrevisionsonslowingglobaldemand(FDX,XPOandnowDAL)versusconcurrentdomesticUSdatasuggestiveofcontinuingcyclicalstrength.Investorsexpectingsomeprecisionfromrailroadexecutives.Fourthquarterraildemandfinishedwithanup-tickinDecember,supportingarelativelyrobustvolumeoutlookforaround2.6%growthin2019.Further,RCAFex-fuel,animportantindicatorforpricing,wasup4.9%in4Q18andisup3.6%in1Q19,pointingtohealthyyieldexpansionenteringtheyear.However,wethinkquestionssurroundingNorthAmericaenergyrelateddemandandspendingwillbecriticaltosustainingindustrialdrivenmomentumin2019,especiallygivenlowercommodityprices.Beyondmarketfundamentals,weexpectinvestorswillfocusonhowUSrailroadscanpotentiallyemulatetherecentefficiencygainsatCSX,especiallygivenrecentmanagementchangesatUnionPacific(see‘UnionPacificMovingintheR...
