Class I railroad earnings growth will slow and their stock prices will slump if they can’t maintain improved service levels and win back volume lost to trucks, a Wall Street firm warns in a new report.
TD Cowen analysts note that rate-driven revenue growth, cost-cutting, and rising profit margins have sustained railroad earnings and stock prices despite continued market share losses to trucks and an overall 11% decline in U.S. rail traffic between 2014 and 2024.
The decline isn’t just due to coal. Even excluding coal, rail volume is down 1% over the past decade. When coal is excluded from the tally, U.S. rail volume is down 1% between 2014 and 2024. Trucking’s market share, meanwhile, has expanded to between 70% and 80%, TD Cowen notes, up from 60% to 65% in the early 2000s.
Inconsistent service is the root cause of rail’s share loss, TD Cowen says. The service gap is stark: Some 66% of shippers receive on-time performance of 80% or better from trucking partners, compared to just 16% from railroads.
“Although rail service metrics reported by the Class I’s have improved considerably, shipper experience remains lacking,” the report says, citing TD Cowen shipper surveys.
Just 6% of rail shippers receive service guarantees, compared to 37% from trucking carriers. And just 46% of rail customers receive a price quote within a week, compared to 94% of trucking customers.
To remain relevant in stock markets, the Class I railroads will have to do four things, TD Cowen says:
- Improve freight visibility through programs such as RailPulse, which allows shippers to monitor the location, status, and health of their cars in real-time.
- Make it easier for customers to interact with the railroad.
- Boost operational flexibility.
- Improve and maintain service levels.
“We view the levers of growth as largely in control of the railroads,” the analysts wrote.
“Despite service showing improvements, there is a gap between published railroad service metrics and shipper sentiment on rail service,” the report says. “Rail shippers have consistently (since we began digitally tracking our survey in ’16) wanted to put more freight onto the railroads, though poor service metrics have dissuaded them.”
A focus on growth is a better alternative to transcontinental mergers, the analysts say.
“Mergers have entered the conversation again recently as sources of growth are questioned. Establishing a transcontinental railroad would reduce interchange complexities and offer cost synergies. However, achieving this is a tall order from a regulatory perspective,” the report says.
“If the rails fail to prove they can grow with a concerted effort made by the industry, they may be forced to press the merger issue,” TD Cowen says.
The Class I railroads all say that providing consistent, reliable service will lead to volume growth and capturing market share from the highway.
But TD Cowen analysts say that in order to gain confidence in those predictions, they’d have to see “shippers acknowledge structural improvements in on-time performance,” railroads continue to press for improved supply chain visibility, stronger than expected reshoring of manufacturing, or major shifts in regulations covering major railroad mergers.
The TD Cowen report, “Growth Is the Logical Path Ahead; Rails at a Major Junction,” was published on June 11.
Share this article
