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Zacks Industry Outlook Highlights: Honda Motor, Nissan Motor, Ford Motor, Kansas City Southern and Union Pacific

For Immediate Release

Chicago, IL – April 26, 2016 – Today, Zacks Equity Research discusses the Railroads, (part 2), including Honda Motor Co., Ltd. (HMC), Nissan Motor Co. (NSANY), Ford Motor Co. (F), Kansas City Southern (KSU) and Union Pacific Corp. (UNP).

Industry: Railroads, part 2


The railroad industry is no doubt faced with some near-term challenges, but the industry’s long-term prospects remain favorable given the improving U.S. economy, increased investments in the industry, implementation of safety standards and an enhanced pricing environment. The aggregate industry picture is expected to continue showing gains on improving operating ratios driven by better cost control measures will continue to propel growth.

A rising population tends to boost freight demand. According to the U.S. Department of Transportation, each American requires the movement of approximately 40 tons of freight per year, which clearly demonstrates the importance of railroads in the country.

Below, we discuss key factors that investors should consider before investing in railroad stocks:

Auto Industry Bounces Back

U.S. light vehicle sales increased 5.7% year over year to a record high of 17.47 million units in 2015, marking the sixth consecutive year of sales increase. The previous high of 17.40 million units was attained in 2000. The impressive results were driven by low fuel prices, easy availability of credit, high pent-up demand and increasing employment. This trend has continued in 2016, with most analysts expecting sales to remain elevated for quite some time.

The average age of a vehicle is 11.5 years currently and is expected to rise 3% by 2020, according to forecasts by IHS Automotive. Thus, the high average age of cars on U.S. roads should continue to boost replacement demand for cars as well as vehicle parts.

Hence, we believe that railroad operators are poised to gain from these factors going forward. At the end of the first quarter of 2016, total carloads for motor vehicles and parts improved 9.1% from the year-earlier quarter.

Mexico has always been a hot favorite for auto companies, given the lower cost of production. Manufacturing units set by major automakers like Honda Motor Co., Ltd. (HMC), Nissan Motor Co. ( NSANY), Mazda and Audi continue to boost auto production in the nation. In order to tap in on the cost advantage, Ford Motor Co. (F) recently announced its decision to set up a $1.6 billion auto assembly plant in Mexico and shift small-car production from the U.S.

Such robust growth in automobile production in the nation will benefit carriers like Kansas City Southern ( KSU), which operates across the Gulf of Mexico. At the end of the fourth quarter of 2016, automotive business volumes for both Kansas City Southern and Union Pacific Corp. ( UNP) improved 1% and 8%, respectively.

Crude by Rail Shipments High

Production from the Shale basins hasn’t come down as much as many were expecting following the sharp drop in the commodity’s price over the past year. Pipelines are primary transportation medium for crude oil, but a number of the newer shale basins didn’t have pipeline infrastructure to keep up with rising volumes. Railroads were the primary beneficiaries such inadequate pipeline capacity from key fields like the Bakken Shale Formation in North Dakota and Montana, the Eagle Ford Shale, Barnett Shale and Permian Basin in Texas, and the Gulf of Mexico and Alberta oil sands.

Rail transportation is reliable as it offers safety and a lower spill rate as compared to pipelines. Moreover, rail companies are continuously investing in upgrades to improve safety standards. The growth in crude-by-rail shipments to East Coast refineries has been made possible by the expansion in the capacity to load and unload crude from unit trains. Rail terminals are now better equipped to carry out the process while five years from now, U.S. rail loading capacity for crude oil was almost entirely for manifest trains. However, more than 30 loading terminals have cropped up throughout the U.S. which can accommodate unit trains.

Oil prices have rebounded lately from the February lows, but concerns about a renewed downturn still remain. An extended period of lower oil prices will likely be at the expense of this revenue source for the railroads.

Rail Investments on the Rise

Currently, the U.S. railroad industry covers less than 50% of the total freight market in America, indicating huge untapped opportunity for market expansion. This opportunity can only be exploited through the improvement of railroad infrastructure that caters to the varied requirements of shippers.

Railroads cover roughly 140,000 miles of tracks which require constant monitoring and maintenance. Over the last 30 years, the U.S. railroad industry has spent nearly $575 billion to build an improved rail network to connect prime business hubs of the country and to assist timely and safe delivery of goods. Such high outlays have also helped railroads gain an edge over other transportation modes like truck, barges and cargo airlines.

In order to construct and develop projects on the company’s main line from Kansas through Missouri, Oklahoma, Arkansas and northwest Louisiana, Kansas City Southern intends to spend $20 million in 2016. Meanwhile, Union Pacific has planned nearly $3.75 billion of capital planning in 2016 which includes $375 million deployment of Positive Train Control (PTC).

According to the Department of Transportation (DOT), the demand for rail freight transportation is likely to increase approximately 88% by 2035. In order to cash in on the opportunity as well as to meet the growing demand, Class I carriers will have to ramp up their investments in railroad networks.

Stringent Safety Measures

According to the latest rules laid out by federal regulators, aging and hazardous tank cars should be replaced within three years as a safety measure. The newer version of the tank cars will be equipped with thicker shells and higher safety shields, thereby providing enhanced fire protection. In recent times, rail safety has become an area of major concern. The National Transportation Safety Board (NSTB) – an independent U.S. federal government agency – recommended the use of ceramic thermal blankets to promote safety standards amid multiple cases of crude oil train derailments over the last couple of years.

In order to enhance safety, the transportation department has issued emergency directives such as restricting the speed limit to 40 miles an hour in urban areas for trains transporting hazardous materials. According to the latest safety standards, railroad companies will have to furnish detailed shipment-related information within 90 minutes of a derailment, if one occurs. Earlier, CSX Corp. had launched mobile emergency information software – Rail Respond – which will allow public safety departments to attain train-list information and the contents of a rail carrier, thereby enhancing its tracking abilities.

At the end of 2015, Union Pacific reported an 11% decline in injury rate, thus becoming the safest Class 1 railroad in the U.S. Hence, it is clear that the implementation of such safety standards has helped reduce accidents and losses arising from derailments.

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HONDA MOTOR (HMC): Free Stock Analysis Report
NISSAN ADR (NSANY): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
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