A buyback announcement from an industry leader is bound to create rumblings on Wall Street. When two big industry names announce share repurchases, analyst noise is like a freight train passing in the night. Stock buybacks from two out of three of the biggest U.S. railroad companies are implying disruption in the freight industry, this time to the detriment of trucks.
Double whammy for railroad buybacks
In February, Union Pacific (UNP 0.56%) announced one of the biggest buyback plans of 2019: a repurchase of 150 million shares at a price above $160 apiece and an $24.1 billion expiring early 2022. Shortly before this, at its fourth-quarter earnings announcement in January 2019, CSX (CSX 0.03%) announced a new $5 billion stock buyback shortly after a previous $5 billion repurchase program was wrapped up.
U.S. rail volumes are still sluggish, so why such optimism from rail? Here's the latest on freight and how systematic precision scheduled railroading (PSR) -- a system that streamlines operations and schedules -- has these two corporate engines poised to take on the trucking industry.
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Intermodal is the crux
A decision is imminent among railroads about whether to reintroduce intermodal routes that were dropped when PSR was initiated.
As U.S. coal volumes faced a systemic decline, Class I railroads had turned to intermodal to fill the gap, which put them in direct competition with trucks. Trucks are often the preferred mode of transport for intermodal -- shorter distances of 500 miles or less -- because they are easier for point-to-point deliveries.
However, as the Class I railroads transitioned to PSR as part of the streamlining process, they shed some of their intermodal lanes that did not fit the PSR operating model. This had spillover effects.
According to the Association of American Railroads, for the week ending Aug. 3, total combined U.S. traffic for the first 31 weeks of 2019 was 16,054,912 carloads and intermodal units, a decrease of 3.5% compared to the previous year.
Streamlining lanes from the network had caused ripple effects across the wider rail network. For example, when CSX cut intermodal routes, shippers moved to truckers J.B. Hunt Transport Services (JBHT 0.77%) or Schneider National (SNDR -0.27%). Thus, in late August, CSX and Union Pacific were talking with shippers and logistics providers about whether to restore intermodal service to Philadelphia, Cincinnati, and Columbus, Ohio.
With the railroads and trucks going head to head, the railroads seem sure of one thing: that their teething problems with precision scheduled railroading (PSR) are finally abating.
Opportunity after opportunity
The upcoming decision on whether to restore the intermodal services could go either way, and an announcement should come by the end of October. However, if confidence is anything to go by, it seems that the railroads are leaning toward restoration.
A senior vice president of intermodal at Schneider opined that getting PSR established required "getting smaller." But the next phase is to add intermodal lanes back, at least for CSX.
One CSX executive said that the company was looking at "opportunity after opportunity after opportunity" to improve earnings and cash flow growth. Indeed, in early August, CSX announced a new intermodal service and partnership with Canadian National Railway (CNI -1.86%) between greater Montreal and Southern Ontario and the CSX-served ports of Philadelphia, New York, New Jersey, and the New York City metropolitan area starting in October 2019. According to the announcement, the service "will convert long-haul trucks to interline rail services."
Distant rumblings
Of course, whether shippers return to the railroads should lanes reopen will depend on the economics and the cheapest options. But as the railroads come to grips with PSR, they may find ways to undercut the trucks.
The truckers are dreading the distant rumblings of an approaching freight train, but it seems likely that the railroads will ramp up their intermodal routes as the PSR transition solidifies. Investors in the shipping space should keep their ears to the ground, because the trains are back.
